In First Week Of ECB "Taper", Draghi Ramps Up Purchases Of Corporate Bonds

In previewing today's newsflows, Deutsche Bank's Jim Reid this morning said that "perhaps the most interesting stat today will be the ECB CSPP number which will include 3 days worth (out of 5) of settled secondary purchases under the new tapering regime. A big debate has been as to whether they taper CSPP in line with the PSPP or leave it running at a similar pace. Obviously the latter would be very good for credit technicals."

Reid said that "for choice I think they do taper CSPP" and added that "we won't know for sure today but we'll perhaps get some clues in the size of the purchases. The last two weeks have seen daily numbers of EU335m and 308m respectively down from the average of 365m since the program started so there's a little clue here that they have been scaling back a touch. We also have to adjust for the slightly below 20% of primary in the number which due to longer settlement periods won't be under the new regime in today's number. So an interesting release to follow this afternoon."

Moments ago the ECB disclosed its "anticipated" first stub week of bond purchases under the tapered regime, when it disclosed that it as of April 7 it held €77.87BN in corporate bonds.

So it may come as a surprise to Jim, and other ECB watchers, that contrary to expectations, not only did the ECB not trim its corporate purchases for the week, but appears to have ramped bond buys, as its holdings rose from €75.46 to €77.87, a €2.41BN increase, or about €482MM per day, roughly a 40% increase from the recent "scaled back" run-rate of €308MM, and also above the daily CSPP program average of €365MM.  To be sure, as Reid also noted, the number has to be adjusted for the slightly below 20% of primary in the number which due to longer settlement periods won't be under the new regime in today's number, although even revising for that, it appears that the ECB has aggressively ramped up its purchases in the first week of the tapered program.

As a reminder, the ECB has provided a strong bid for Euro credit since its announcement of CSPP in Mar-16. iBoxx EUR IG and HY corporate credit spreads have tightened by 40bps and 197bps respectively since announcement. Corporate purchases began on 08- Jun-16, with a weekly average purchase of ~€1.8bn and total corporate bond holdings to date of €75.45bn (as of 31-Mar-17), or roughly €7.8bn a month. The ECB purchases aggregated a total return of -0.46% in Mar'17 vs 1.06% in Feb'17. Bonds purchased under CSPP have performed worse than the broad index (iBoxx EUR IG Non-fin Senior index) which returned -0.30% in March. Utilities sector with highest exposure by amount outstanding returned -0.06%.

So what did the ECB buy in the latest week? According to a Bloomberg the ECB purchased at least 11 corporate bonds under the CSPP program, which lifts the number of securities held to 894.

  • As of Friday, the ECB now holds €77.87 Billion, or ~12.39%  ofthe €628.34 billion in European corporate bonds outstanding.
  • The ECB bought bonds issued by BMW Finance, Daimler, DIA, EDF, Engie, HeidelbergCement, Italgas, Kering, Suez and Telecom Italia;
  • Of note: 148, or 16.6% of the 894 securities are negative yielding. Utilities remain the largest industry group with 237 securities.

Finally, since the first week of the month may have some "noise" in the ECB's purchases, we suggest waiting until next Monday for the definitive answer if the ECB has ignored tapering when it comes to corporate bonds, before rushing to buy even more Euopean corporates in hopes of frontrunning the ECB.