Investors have carried out a “land grab” of corporate bonds, ahead of the ECB beginning its corporate bond buying programme tomorrow.Update: "The ECB’s momentous step into corporate asset purchases"
Mitch Reznick, co-head of credit at Hermes Investment Management, says that the lead-up to the ECB including corporate bonds in its QE program has already had an impact on the corporate bond market.
“The prospect of a determined, deep-pocketed buyer in primary and secondary bond markets has sent credit spreads tighter as it triggered a land-grab for credit,” he says.
In the ECB’s March meeting, president Mario Draghi revealed the asset purchase program, which had previously been focused on government bonds, was being extended to corporate bonds, albeit excluding banks. The programme was also expanded from €60bn a month to €80bn.
The ECB’s inclusion of long-dated bonds may also affect the make-up of bonds issued, says Marilyn Watson, head of global fundamental fixed income strategy at BlackRock. The ECB will buy bonds up to 30-year terms.
“We have already started to see a shift in the maturity of recent new euro corporate bond issuance with an increase in longer-dated supply. This may be the start of a much deeper longer-dated corporate bond market in Europe, which has historically been far smaller than that of the US,” she adds.
Jon Jonsson, manager of the Neuberger Berman Global Bond Absolute Return fund, says there is a danger that the rising market is likely to lift all bonds, regardless of quality.
“There are risks associated with the new program. Companies too small or highly-leveraged to issue high-yield bonds under normal circumstances may be able to do so in this environment, and investment grade companies may be tempted to over-extend themselves – but that has been the case in every bull market in credit,” he says....MORE