Mario Draghi, president of the European Central Bank, speaks during a news conference... Read More
The average rate on investment-grade company bonds fell to 1.05 percent Thursday in London after the European Central Bank’s president announced the purchases of government securities, according to Bank of America Merrill Lynch index data. The ECB’s move may push costs below the threshold, according to Barnaby Martin, a London-based credit strategist at Bank of America.
Draghi’s efforts to revive the region’s economy stand to crowd investors out of safer markets like government debt, pushing them into corporate notes. Yields
on those securities have plunged from almost 5 percent at the height of the sovereign debt crisis in 2011 as the central bank suppressed interest rates.
“The race is on to find assets in euros that yield more than nothing,” said Geraud Charpin, a London-based money manager at BlueBay Asset Management LLP, which oversees more than $65.8 billion.
Following Fed
The ECB is ramping up asset purchases, which it started in the fourth quarter with covered bonds and asset-backed securities, to drive inflation back toward its goal of about 2 percent. The expanded stimulus comes six years after the Federal Reserve started its bond-buying program to inject cash into the U.S. economy.The Fed expanded its balance sheet by more than $3.5 trillion by buying Treasuries and mortgage bonds in programs it ended last year. That cut yields on dollar-denominated corporate debt to a record low of 2.62 percent in May 2013, on a yield-to-worst basis, Bank of America Merrill Lynch index data show.
As the Fed started pulling back from its asset purchases and investors anticipated the ECB would be pressed to start them, investors started demanding more to own dollar debt instead of euro-denominated bonds. Yields on U.S. debt climbed to 2.08 percentage points more than European securities last month, the biggest gap in nine years.
Liquidity Strains
The ECB said it plans to buy 60 billion euros of assets a month until at least the end of September 2016. It will hold a share of the securities while requiring individual central banks to conduct the bond purchases in the hope that will make nations more responsible for the management of their economies.Governing Council Member Ardo Hansson had advocated for the inclusion of corporate debt in the purchase program.
Draghi is sidestepping a market where investors are struggling to buy and sell securities, with Royal Bank of Scotland Group Plc saying there’s been about a 70 percent drop in trading since 2008. Transactions are declining as banks cut their holdings of securities to preserve capital in response to tougher capital rules.
“The illiquidity of the corporate-bond market is likely to have been a big factor in the ECB avoiding that market,” according to Hyung-Ja de Zeeuw, a senior credit strategist at ABN Amro Bank NV in Amsterdam.
The stimulus is still boosting demand for company debt. The cost of insuring corporate bonds fell to a seven-year low after the plan was announced. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies dropped two basis points to 54 basis points, the lowest since January 2008.
Companies are taking advantage of record-low yields and demand for their securities. Sales of euro-denominated corporate bonds swelled to 791 billion euros last year, the most since 2010, according to data compiled by Bloomberg. There’s been 88 billion euros of issuance in the region this year.
“With the ECB buying up large quantities of sovereign bonds, investors will need to look elsewhere, meaning that we are likely to see increased demand for corporates,” according to David Zahn, head of European fixed income, at Franklin Templeton Investments.
No comments:
Post a Comment