|European Central Bank headquarters, Frankfurt|
Markets got their first glimpse on Tuesday, June 2, of just what the European Central Bank has been so busy buying in its Pandemic Emergency Purchase Programme (PEPP), a €750 billion scheme set up by the ECB in March to help maintain monetary policy transmission in the face of the economic chaos caused by government responses to the coronavirus pandemic.
While most purchases so far are of sovereign debt, as expected, the striking finding is that most of the private sector debt that the bank bought – some 76% of the €46 billion total in that segment – was in the commercial paper (CP) market.
Within that, some 81% – a total of €28.7 billion – was primary issuance.
It was in CP where some of the earliest corporate funding pain was felt as liquidity began to dry up in the middle of March, a factor that led to companies quickly drawing on their bank lines to refinance paper that could not be rolled over, as well as to provide additional working capital.
That pressure began to ease as stimulus measures kicked in – including the ECB's PEPP, which expanded on existing measures like the asset purchase programme (APP) and the corporate sector purchase programme (CSPP).
The PEPP waived previous eligibility requirements to allow the purchase of Greek government debt, and allowed the ECB to start buying non-financial commercial paper.
The striking finding is that 76% of the €46 billion private sector debt the ECB bought was in the commercial paper market
While the €10.58 billion of corporate bond buying by the ECB was dwarfed by its activity in the CP market, it still mattered – in particular where the bank chose to deploy its firepower.
Bankers had already commented to Euromoney throughout late March and April that official institutions were playing a larger role than usual in the order books of euro-denominated bond issues.
In a report published today, June 3, and based on the ECB data, analysts at CreditSights estimate that primary market buying accounted for 59% of total monthly ECB purchases of corporate bonds in April and 66% in May.
Since the CSPP was initiated in March 2016, the analysts note that primary market purchases have totalled only about 16% of the portfolio, with primary activity generally rising only in seasonal periods of low liquidity.
When it comes to secondary market activity, the lower than usual percentage of total purchases there suggests that the existence of the ECB backstop bid is the important thing for investors, rather than actual buying in the market.
Primary deals, unsurprisingly, needed a little more help to overcome the fear. In any case, the more obvious deployment of official firepower in primary books will have sent a calming message to secondary markets, creating a positive feedback loop that lessened the need for active intervention there.
The PEPP uses the European Union's capital key – a measure of the relative sizes of EU economies that is also used to determine a national central bank's contribution to ECB capital – as a benchmark allocation for purchases of debt originating in different countries.
But the scheme is able to deviate from the capital key. Announcing the launch of the PEPP in late March, the ECB said that "purchases will be conducted in a flexible manner".
According to this first slug of data, it is certainly using that flexibility when it comes to sovereign bonds.
The CreditSights analysts observe that PEPP purchases of Italian sovereign debt are around 4.7 percentage points above the country's capital key-weighted allocation, while Spain is more than one percentage point over.
France is underweight by about 6.8 percentage points, "but that could be due to a significantly larger share of the commercial paper programme being allocation to French credits," noted the CreditSights analysts.
The current legal dispute between the German constitutional court and the ECB might have weighed on some decisions around purchases.
On May 5, the German court rocked EU institutions with its threat to block the purchase of German government bonds through the ECB's quantitative easing programme unless the ECB provided a "proportionality assessment" within three months. That ruling did not cover the PEPP, but has been widely thought to pave the way for similar challenges to it.
The weighted average maturity of the German sovereign debt bought under the PEPP is just 3.15 years, the shortest of all countries. For Italy it is 7.07 years, for France 8.19, for Spain 8.28.
This pattern "would allow for a smoother automatic roll-off from the programme for Germany once net purchases stop while the rest of the Eurozone will see a slower pace of roll-off," according to CreditSights.
The ECB's governing council is next scheduled to meet on Thursday and is expected to increase the current €750 billion scope of the PEPP by as much as €500 billion. An increase of that size may require an extension of the PEPP from December 2020, they note.