End of ECB stimulus to leave demand ‘void’ in corporate bond market

The end of the European Central Bank’s huge bond buying regime will leave “empty” demand in the bloc’s corporate debt market, investors warn, as they prepare for rising interest rates and greater volatility.

As part of its corporate bond acquisition program, the ECB held 341 billion euros of corporate debt at the end of May – having increased its holdings by almost 140 billion euros since the first days of the Corona plague in March 2020.

The ECB Became not only the last-resort buyer but the first-origin buyer, “said Barnaby Martin, head of European credit strategy at the Bank of America.” The huge volume they bought was huge. ”

But now, the central bank plans to halt the huge plan early in the third quarter of the year, before raising interest rates in order to cool rising inflation.

The prospect of a withdrawal of such funding marks a “major” moment that will leave an “empty” of demand, Martin said. This will lead to a larger spread of spreads – the perceived risk of different types of bonds relative to each other – and in return, to companies looking for less funding, according to investors.

“The biggest question the bond market is asking is who is the marginal buyer of the debt from July onwards?” Martin said.

James Walkins, head of the credit team at Aviva Investors’ investment rank, added that the withdrawal from support would be “unpleasant”, but the market was forced to “stay away from a halt”.

Despite speculation that the ECB will continue Support debt markets Of the weak eurozone countries in times of pressure, credit traders have begun to lower their holdings in the run-up to the impending retreat. Investors were also alarmed by continued high inflation and expectations of higher interest rates, which are holding back the pull of fixed-income securities.

The most risky European corporate bonds and higher-grade bonds fell around 9% in 2022 on an overall yield basis, according to Ice Data Services indices.

“[The end of stimulus] It will be manageable for a local core investment-grade core company with a lot of demand from local investors, ”Walkins said, referring to companies with high credit ratings.

The ECB’s asset acquisition program has lowered price volatility and pushed debt yields to higher levels, with a small spread between companies and sectors. This encouraged investors looking for a return to buy more risky instruments like subordinated debt to find returns, Walkins said.

“These secondary benefactors of Quantitative relief “It is likely that they will not enter the market for the time being,” he said.

Greater volatility will encourage a more active bond investment strategy, Martin said: “All QE will end very, very early July. After a few weeks, you have a credit market that better reflects risks. ”

“For an active manager, they need to delve into emerging risks. If they can identify and isolate them, they can position themselves accordingly,” Martin added.

Despite the less supportive environment, there is little expectation of immediate failures, said Tejana Grill Castro, head of partner for public markets at Muzinich & Co.[Many] Companies pledged financing last year and have enough cash for 18 months. When they run out of liquidity, the market expects higher default rates. “

End of ECB stimulus to leave demand ‘void’ in corporate bond market Source link End of ECB stimulus to leave demand ‘void’ in corporate bond market

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