Credit markets reacted with unambiguous positivity to the latest stimulus measures announced by Mario Draghi. The inclusion of bonds issued by non-bank corporations established in the euro area in the European Central Bank (ECB)’s asset purchase programme (corporate sector purchase programme – ‘CSPP’) has been well received by corporate bond markets. Both investment grade and high yield bonds rallied in the immediate aftermath of the announcements, a rally that showed more strength than the short-lived rise in equity and government bond markets.
At the moment, details are thin on the ground about the expansion of the purchase programme to include corporate bonds. However, Draghi has said that he expects these purchases to commence towards the end of Q2 2016 with some banks estimating that the universe of available bonds will be over €500bn.
The financial sector has been one of the underperformers in corporate bond markets so far this year. The ECB is clearly cognisant of damaging profitability and confidence in the banking sector by introducing a more deeply negative deposit rate (the rate at which banks can deposit excess reserves with the ECB) of -0.4%. To mitigate these impacts, it has reduced the refinancing rate (the rate at which banks can borrow money from the ECB) to 0%. It has also extended the targeted longer-term refinancing operations (TLTROs), which provides cheaper capital to the sector. From June 2016, the banks will be able to borrow money at or close to the deposit rate through this extended TLTRO programme. In an effort to stimulate the real economy, some banks are now effectively being paid to lend money.
With cheaper finance available elsewhere, it now seems unlikely that the significant issuance in senior bank bonds that we had expected this year will take place. However, on the back of the rally in credit markets, we are likely to see more subordinated capital issued with banks focusing on further additional tier 1 (AT1) issuance.
It is worth noting that the two points in the ECB’s statement that are most supportive for the credit markets (corporate bond purchases and the new TLTRO programme) are also those with the most questions still hanging over them. The ECB has yet to define exactly what it means by “non-bank corporations”, when and how it will purchase corporate bonds, and while “borrowing conditions in these operations (TLTRO) can be as low as the deposit facility”, will they be in practice?