World Economy

Investors Concerned ECB Won’t Buy Enough Debt

Investors Concerned ECB Won’t Buy Enough DebtInvestors Concerned ECB Won’t Buy Enough Debt

Investors will be watching Mario Draghi’s first corporate bond purchases on Wednesday for an indication of whether they were right to snap up the notes before the European Central Bank.

The ECB is adding investment-grade corporate notes to its €80 billion ($91 billion) monthly purchase program, which already includes covered bonds, asset-backed securities and government debt, as part of efforts to encourage growth. The challenge will be buying enough bonds in increasingly illiquid markets, investors and analysts say, according to a Bloomberg report.

“There is a fair amount riding on this in terms of the ECB’s credibility,” said Victoria Whitehead, a Paris-based senior portfolio manager at BNP Paribas Investment Partners, which oversees about €521 billion. “The perception is that if they can’t buy at least €5 billion of bonds a month, the program will be seen as unsuccessful.”

Investors have piled into investment-grade corporate bonds on the promise of central bank purchases, driving up prices and cutting borrowing costs. The average yield for euro notes tumbled to 1.002% on Monday, the lowest in more than a year, according to Bank of America Merrill Lynch index data.

 Companies responded to the surge in demand by selling more than €50 billion of bonds in the single currency in May, the second-busiest month on record, according to data compiled by Bloomberg.

  ECB Purchase

While purchases of more than €5 billion of bonds may boost the market, investors may be disappointed if the ECB bought less than €3 billion a month, CreditSights analysts wrote in a June 5 report. Commerzbank AG and Morgan Stanley don’t expect the monthly purchases to surpass €5 billion.

“We’re worried that they won’t be able to buy quite as much as they want to,” said Tim Winstone, a London-based portfolio manager at Henderson Global Investors Ltd. which oversees about £93 billion ($135 billion) of assets. “If the buying underwhelms and reported volumes are less than most people expect, there is a risk of a selloff.”

The ECB can choose from as many as 1,049 securities totaling €620 billion when it starts buying, according to data compiled by Bloomberg. CreditSights puts the size of the universe at about €628 billion, while Morgan Stanley estimates it is about €675 billion.

The ECB will publish a list of its corporate bond holdings on July 18 and update it every Monday, according to the central bank.

Investors have previously been disappointed by other parts of the ECB’s bond-buying program. Securitized debt surged to the highest in more than seven years when the central bank announced plans to start buying asset-backed securities in 2014.

They soon declined when purchases failed to meet expectations. Since the central bank started buying the notes in November 2014, it has accumulated just €19 billion of them.

“So much depends on the sizes of the purchases, which the ECB has been vague about on purpose,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “They might still be figuring out their approach.”