ECB ends stimulus to make demand “empty” in the corporate bond market

Investors warn that ending the European Central Bank’s massive bond-buying regime will leave a “gap” in demand in the bloc’s corporate debt markets.

Under its corporate bond-buying program, the ECB owned 341 billion euros of corporate debt at the end of May – after having increased its holdings to nearly 140 billion euros since the early days of the coronavirus pandemic. in March 2020.

ECB Barnaby Martin, head of European credit strategy at Bank of America, became not only the ultimate resort buyer but also the first resort buyer. “The sheer volume they’ve bought is huge.”

But for now, the central bank plans to pause this broad scheme as early as the third quarter of this year, before raising interest rates in a bid to cool rising inflation.

The prospect of a funding drawdown marks a “critical” time that would leave a “gap” in demand, Martin said. This, according to investors, should lead to more spread dispersion – the perceived riskiness of the bonds relative to each other – and in turn for companies to seek less financing, according to investors. the investors.

“The biggest question the bond market is asking is who is the marginal buyer of debt from July onwards?” Martin said.

James Vokins, head of investment-grade credit at Aviva Investors, added that the withdrawal of support would be “annoying” but that the market must “transform from being in trouble”.

Despite speculation that the ECB will still debt market support of weaker eurozone countries in times of stress, credit traders have begun selling off their holdings ahead of the impending stimulus withdrawal. Investors are also spooked by persistently high inflation and expectations of higher interest rates, which reduce the appeal of fixed-income securities.

According to the Ice Data Services index, the riskiest European corporate bonds and premium bonds have fallen about 9% in 2022 on a total yield basis.

“[The end of stimulus] would be manageable for a core domestic investment company with plenty of demand from domestic investors,” Vokins said, referring to companies with high credit ratings.

The ECB’s asset purchase program has reduced volatility in prices and pushed yields down on higher-grade debt, with less dispersion across companies and sectors. This incentivizes investors looking for returns to buy riskier instruments like subordinated debt in search of a return, Vokins said.

“Secondary benefactors of quantitative easing He said:

“All QE will end very soon in July,” Martin said. After a few weeks, you’ll have a credit market that will better reflect risk. ”

“For a dynamic manager, they have to delve into budding risks. If they can identify and isolate them, they can locate them accordingly,” added Martin.

Tatjana Greil Castro, co-director of public markets at Muzinich & Co.[Many] companies secured funding last year and had enough cash for 18 months. When they run out of liquidity, the market predicts higher default rates.”

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