As well as implementing a negative deposit rate, in March it announced that its ongoing asset purchase programme (APP) would not only rise to €80bn per month, but also include “investment grade euro-denominated bonds issued by non-bank corporations”. It made its first purchases of corporate bonds on 8 June and by the weekend it held just under €350m worth.
The ECB will include bonds issued by companies headquartered outside the eurozone; it can buy in both the primary and secondary markets; it can purchase up to 70% of an issue, regardless of issue size, and maturities as long as 30 years; and “non-bank” corporations includes insurance companies and auto companies with bank-like financing divisions. And if high-yield investors are feeling a little left out, here are three reasons why it could have a positive impact in their markets—and one reason why it might introduce extra risk.
The first positive impact could come from the ECB buying in the high-yield market itself. Bonds need only be investment grade-rated by any one of S&P, Moody’s, Fitch or DBRS. Some companies that investors may think of as investment-grade have outstanding bonds with high-yield ratings from one of the agencies: euro bonds issued by Telecom Italia are just one prominent example.
The second impact is likely to come from investment-grade investors migrating to high yield. This will be a strengthening of a trend already in place since the ECB became active in government bond markets, which caused some investors to seek yield in investment-grade corporate markets, in turning pushing some corporate bond investors further down the credit-quality spectrum. That trend has already seen most “core-plus” bond strategies use up their 15-20% buckets for high-yield, so this programme could incentivize more investors to implement separate high-yield allocations, especially while default rates remain low. The inflows that met the ECB’s announcement in March may be an early sign of that.
Monthly net fund flows to euro high yield, 2016 (€m)
Source: JPMorgan. Data as of 31 May, 2016
