As a result of the global financial crisis, key interest rates have come close to their effective lower bound (ELB). The ECB elected to undertake non-standard measures in an attempt to return inflation to 2% – the Governing Council’s definition of price stability. Asset purchases are one of the non-standard measures the ECB is using to achieve this objective.
The ECB buys a range of assets including government bonds, securities issued by European supranational institutions, asset-backed securities, covered bonds, and now corporate bonds, at a pace of €80 billion per month, through its expanded asset purchase programme (APP). Purchases made via the APP are intended to influence broader financial conditions, encourage economic growth and help inflation rates return to levels below, but close to, 2% in the medium term. APP purchases are expected to be carried out until the December 2017, though the ECB has said it is ready to extend its monetary stimulus program as needed. Markets await information on the fate of the QE programme; an update is expected following the Governing Council meeting of the ECB in Frankfurt October 26 2017.
Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area were defined as eligible assets for regular purchases under the corporate sector purchase programme (CSPP).
On March 10 2016, the ECB decided on a number of non-standard monetary policy measures, including the launch of the CSPP as an additional component of the asset purchase programme (APP). From April 2016, the ECB has also increased the combined monthly purchases under the APP from €60 billion to €80 billion.
The CSPP kicked off June 8 2016; on the first day, the ECB was reportedly already buying five-year utility bonds in the secondary market.
The ECB collateral eligibility framework – the rules that lay down which assets are acceptable as collateral for monetary policy credit operations – were used to determine the eligibility of corporate sector securities purchased under the CSPP.
Eligible issuers holding debt instruments for purchase under the CSPP:
- must be non-bank corporations;
- must be a corporation established in the euro area. Corporate debt instruments issued by corporations incorporated in the euro area whose ultimate parent is not based in the euro area are also eligible for purchase under the CSPP, provided they fulfil all the other eligibility criteria.
Debt instruments eligible for purchase must fulfil the following criteria:
- bonds must be issued in the eurozone and denominated in euro;
- have a minimum credit assessment of at least credit quality step 3 (rating of BBB- or equivalent) obtained from an external credit assessment institution;
- have a minimum remaining maturity of six months and a maximum remaining maturity of 30 years at the time of purchase.
Ineligible issuers include:
- credit institutions, or have any parent undertaking which is a credit institution;
- Single Supervisory Mechanism (SSM) supervised entities, or a subsidiary of a supervised entity or group, or have a parent company subject to banking supervision outside the euro area;
- investment firms or comparable to banks in terms of their activities according to the Markets in Financial Instruments Directive (MiFID II);
- asset management vehicles (defined in the Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) regulation) or a national asset management and divestment fund established to support financial sector restructuring and/or resolution.
Following the introduction of this programme, public undertakings that complied with the eligibility criteria of the public sector purchase programme (PSPP) and the CSPP were then only be eligible for purchases under either the CSPP or the PSPP. Because of this, certain agency issuers which were previously eligible under the PSPP were instead become eligible for the CSPP.
The purchases were conducted in the primary and secondary markets with counterparties that were eligible for the Eurosystem’s monetary policy operations or counterparties used by the Eurosystem for the investment of its euro-denominated portfolio.
Six Eurosystem national central banks (NCBs) acting on behalf of the Eurosystem, coordinated by the ECB, carried out the CSPP: Nationale Bank van België / Banque Nationale de Belgique, Deutsche Bundesbank, Banco de España, Banque de France, Banca d’Italia and Suomen Pankki/Finlands Bank. Each NCB is responsible for purchases from issuers in a particular part of the euro area. The CSPP holdings were made available for securities lending by the relevant NCBs.
The Eurosystem applies an issue share limit of 70% per international securities identification number (ISIN) on the basis of the outstanding amount. To maximize the efficiency of the CSPP securities lending programme, a list of the ISINs of bonds held by the purchasing NCBs under the CSPP was published every Monday beginning 18 July, when bonds held under the CSPP were available for lending.
The volume of CSPP holdings was published on a weekly and monthly basis. A breakdown of primary and secondary market purchases was also published every month.
From January to June 2017, 15% of CSPP holdings were purchased in the primary market; average investor demand for CSPP-eligible corporate bond issuances was around three times higher than the issued amount.
Those using asset purchase programmes found small but significant annual increases in GDP of 1/4% to 1/2% each; 10-year interest rates down by 1/4% to 3/8%.
The results of the ECB’s asset purchase programmes found small but significant annual GDP increases at around 0.3% on average and and inflation -0.05% (January 2015 to early 2016). Output has since grown at annual rates of 2% and prices at 1.5%.
Euromoney coverage:Corporate finance: The high cost of cheap money
Europe’s taper tantrum exposes bond market vulnerability
The ECB has published a study of the implementation and impact of its corporate sector purchase programme (CSPP) a year since its launch. Its findings will come as little surprise to those in the region’s bond markets.
Capital markets: Has Brexit killed CMU? – Brexit fuels corporate bond dysfunction
Mario Draghi announced the ECB’s Corporate Sector Purchasing Programme (CSPP) on March 10 this year and its impact on the investment-grade bond market has been dramatic.
|CSPP: The bull in the corporate china shop|
News of the ECB’s corporate-sector purchasing programme shocked the market in March and has already prompted a stampede for paper among desperate investors before the central bank has purchased a single bond. Bankers and investors are already complaining that the programme will not have its desired effect.
Sideways: ECB pixie dust fails to revive credit trading
The European Central Bank’s announcement that it will extend its debt purchases to corporate bonds has given a boost to the region’s investment banks.
|The big wobble: Can the SSM stabilize Europe's banking system?|
The ECB’s bank-friendly stimulus package last month, its commitment to buy non-financial corporate bonds and a European Commission proposal for a more investor-friendly pay-out policy for AT1 notes – to avoid fears over missed coupon payments – buoyed a credit rally in March.
Against the tide: Asia will drive the dollar
It looks like Mario Draghi has girded his loins to take on the 'further-action naysayers’ at the German Bundesbank. In March, expect €10 billion to €15 billion a month added to the asset purchase programme; a further extension of the duration of the plan; a possible broadening of its scope; and a cut in the deposit rate of 10 basis points to -40bp.
|Macaskill on markets: How to game a Draghi Put for corporate bonds|
European Central Bank president Mario Draghi has been dropping further hints that he is considering unconventional measures to combat deflationary pressures in the region. This sets the stage for potential central bank buying of European corporate bonds, which in turn raises the question of whether there will be opportunities for nimble investors to game a new ‘Draghi Put’ for corporate credit.
Macaskill on markets: Vorsprung durch Vorschrift
The fallout from the Volkswagen scandal may end up being felt disproportionately in the credit markets, partly because it is a bellwether issuer, but also because investors increasingly see corporate bonds as a safe-haven asset class, despite issues with liquidity and transparency compared to equities. This could lead to closer oversight of the credit markets, especially if the European Central Bank (ECB) decides to extend its quantitative easing programme with purchases of corporate bonds in a bid to stimulate growth in the region.
Best borrowers 2015: Does QE stand for Quick Euros?
The anticipation of rising demand for credit in Europe is one element that borrowers are likely to have taken into account when they looked at accessing the euro market. So too may have been press reports swirling around late last year to the effect that the ECB would take a leaf out of the Bank of England’s book and extend its buying programme to corporate bonds.
Corporate bonds: QE and negative rates warp credit markets
Quantitative easing in the eurozone, together with negative short-term deposit rates at the ECB and among several European countries, is forcing some peculiar distortions in the corporate bond markets.
Failed ECB asset purchases plan has wrought 'malign impacts' for the market
As the European bank now considers extending its asset-purchase programme from covered and ABS to corporate and sovereigns, the indifferent and sometime hostile attitude of market participants might be a sign of things to come.
ECB's ABS purchase plan: Draghi out of options
Corporate bond-buying rumour underscores need for further ECB action.
ECB commences covered bonds amid intrigue
The ECB commenced its covered bonds purchasing programme last week, but no sooner had it started than rumours surfaced about a new plan to purchase corporate bonds. The fevered speculation demonstrates the lack of confidence in the ECB's existing plan, reviving questions about full-scale QE and its seniority in bond holdings.
ECB'S ABS and covered bond purchase programmes: special focus
Mario Draghi hopes that his ABS and covered bond private sector purchase programmes will be the fillip to economic growth in Europe that has so far eluded him. Read Euromoney's in-depth coverage of the background to the issues, what the plans are and why they are unlikely to work.
ECB collateral eligibility framework
The list of eligible marketable assets is updated daily, published via the Market Information Dissemination (MID) system. Information on accessing this system, and guidance for confirming asset eligibility, is available on the ECB's website.
ECB announces remaining details of the corporate sector purchase programme (CSPP)
ECB press release, 2 June 2016
ECB adds corporate sector purchase programme (CSPP) to the asset purchase programme (APP) and announces changes to APP
ECB press release, 10 March 2016
ECB announces details of the corporate sector purchase programme (CSPP)
ECB press release, 21 April 2016