Corporate debt may take bigger slice of QE pie as ECB tapers

LONDON/FRANKFURT (Reuters) - The ECB may consider scaling back purchases of corporate bonds more slowly than those of government debt when it starts tapering its massive stimulus scheme, partly because the bank is nearing self-imposed limits on what it can buy.

The headquarters of the European Central Bank (ECB) are illuminated with a giant euro sign at the start of the "Luminale, light and building" event in Frankfurt, Germany, March 12, 2016. EUTERS/Kai Pfaffenbach/File Photo

The European Central Bank has signaled it is ready to pull back from its 2.3 trillion euro ($2.8 trillion) extraordinary stimulus beginning in January 2018 and will start to work out the details at its monthly meeting in October.

Many economists expect monthly asset purchases to fall to 40 billion euros ($48 billion) from 60 billion now. But even under this scenario, the ECB is expected to run close to the ceiling on debt it can hold in some countries, including Germany, in the first half of next year.

The corporate bond buying program remains well under its limits by contrast. Some policymakers argue the program, which has exceeded expectations in both volumes and effectiveness, gets cash to the sectors in greatest need and could be ramped up.

“I’ve been a relatively big fan of the corporate sector purchase program,” ECB rate setter Ardo Hansson told Reuters. “All asset purchases are not created equal. We’re trying to get the enterprises and households to spend or invest a bit more.”

“If corporate sector purchases are more effective, as I believe they are, you could push those a little bit harder,” said Hansson, Estonia’s central bank governor.

Two other policymakers, who spoke on condition of anonymity, expressed a similar view but stressed no decision has been made.

The ECB declined to comment.

ECB's corporate bond purchases:


The ECB’s quantitative easing program, launched in March 2015 to boost inflation and economic growth by pinning down borrowing costs in the euro zone, first focused on the biggest and most liquid government bond markets but was extended to include corporate bonds in June last year.

Corporate bond issuance has surged, while debt issuance from Germany - the main source for ECB bond buying - has been capped as Berlin takes advantage of a budget surplus to borrow less. The bulk of the purchases remain in government bonds, however.

“With a taper, we’re pretty sure what the ECB will end up doing is leave the corporate bond program unchanged and the tapering all falls on the government bond part,” said Mark Dowding, co-head of investment grade at BlueBay Asset Management.

He estimated the ECB buys around 6 billion euros each of corporate bonds and supranational debt and 48 billion euros of government and other bonds every month.

“In January, we believe that this will be approximately 6 billion euros of corporate bonds, around 6 billion euros of supranationals and 28 billion euros of government bonds and others to give a total of 40 billion euros,” he said.

The ECB can only buy up to 33 percent of each bond issued by a government, agency or region. It can buy up to 50 percent of supranational bonds and 70 percent of corporate or covered bonds, which are guaranteed by a pool of assets.

Those limits are unlikely to change in view of the brighter economic conditions in the euro zone.

“There’s still a positive movement in corporate bond issuance, which is not necessarily what we’ve seen in government bonds,” said Souheir Asba, credit strategist at Bank of America Merrill Lynch. “The ECB only holds 13 percent of the total eligible universe of corporate bonds, compared to their upper limit of 70 percent.”

Euro zone corporate bond issuance:

Pictet Wealth Management’s Frederik Ducrozet said if the ECB decided to only scale back government bond purchases to get to 40 billion euros a month, leaving other bond purchases steady at current levels, public sector bond buying would fall to 30.5 billion euros.

If it scaled down all its buying proportionally the ECB could wind up the scheme by next September, he said, but maintaining relatively high purchases of corporate bonds would give the ECB up to three more months to December 2018, which many central bankers might find attractive.

Adding a new asset class such as stocks was also an option, but policymakers told Reuters this would send the wrong signal to the markets and to the region.

Rate setters disagree on whether to set a definitive end-date for the program when they meet in October, raising the possibility they may want to retain the option of prolonging it again, Reuters reported on Tuesday.

Tapering corporate bond buying more slowly “would also help to maintain the stimulus to business investment a little longer,” said Capital Economics European economist Jack Allen.

Reporting and graphics by Balazs Koranyi and Dhara Ranasinghe; Editing by Sonya Hepinstall