Jorgen Kjaersgaard (pictured) is head of Global Credit at AllianceBernstein.
As the European Central Bank (ECB) tapers its quantitative easing (QE) programme from €60bn to €30bn a month, the volume of corporate bonds it buys under its Corporate Sector Purchase Programme (CSPP) is expected to remain largely unchanged.
Challenges associated with the ECB’s government bond-buying criteria mean it will need to continue to turn to corporate issuance to fulfill its monthly €30bn quota. As a result, we expect ECB corporate bond purchases to be around €5bn per month this year, compared with €6-8bn per month in 2017—despite the ECB having halved its overall QE purchases.
By the time QE comes to its anticipated end in September, the ECB could be holding a €175bn corporate bond portfolio. We expect the ECB will continue to reinvest maturities after this date—and these reinvestments could amount to anywhere between €10bn and €25bn per annum.
Based on reinvestments alone, the ECB will continue to absorb a significant portion of available supply. Over the last five years, average annual net issuance of non-financial EUR-denominated investment-grade corporate bonds has amounted to around €110bn (gross issuance amounts to around €245bn). This figure is likely to stay broadly unchanged—although the market could be impacted by fewer US companies issuing EUR paper because of US tax reform: US issuers now account for more than 20% of euro-denominated investment-grade supply.
With ECB reinvestments absorbing a significant portion of the available supply in corporate bonds, investors will need to look for opportunities outside of the ECB’s scope, for instance, in selective financials and high yield.