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1970-01-01 02:00:00
rlp
Jun 11th 2016
TRY and try again. On June 8th the European Central Bank (ECB) started buying
corporate bonds, in its latest effort to gin up inflation in the euro area.
Prices declined slightly in May compared with the same month a year before; the
ECB s inflation target is just under 2%. The scheme has already helped boost
the zone s corporate-bond market. Doing the same to its economy looks a tall
order.
The purchases form part of the ECB s quantitative-easing programme, under which
it is already buying 80 billion-worth ($91 billion) of public-sector bonds,
covered bonds and asset-backed securities monthly. (Government debt, of which
the ECB has amassed more than 800 billion, accounts for most.) To qualify,
corporate bonds must be investment-grade and issued by euro-area firms other
than banks.
Analysts reckon that 600 billion-plus of bonds fit these criteria. The bank
hasn t yet said whose debt, or how much, it will buy; from mid-July it will
report holdings weekly. According to Bloomberg, first-day purchases included
bonds issued by Anheuser-Busch InBev, the world s biggest brewer; Generali, an
Italian insurer; Siemens, a German engineering giant; and Telef nica, a Spanish
telecoms firm.
The ECB is likely to be a hefty buyer. It can acquire bonds in the primary or
secondary market, and can hold up to 70% of an issue. Some analysts guess it
might snap up 5 billion-10 billion a month. That may be a stretch. Even if it
bought a quarter of the likely total of this year s eligible issues, calculates
Suki Mann of CreditMarketDaily.com, a website, that would still only work out
at 4 billion a month.
Yields tumbled in anticipation of the ECB s entry. According to Bank of America
Merrill Lynch, yields on investment-grade bonds have slid under 1%, their
lowest for a year; those on high-yield (junk) bonds have fallen, too.
That suggests the ECB is achieving its objective: directly reducing companies
financing costs. But if it buys less than expected, the rally could go into
reverse. And whether cheaper borrowing will spark investment and inflation is
questionable: in March, when the ECB unveiled its plan, investment-grade yields
were a less-than-prohibitive 1.3%. The ECB is also funnelling cash into banks
as fast as it can: another lending-incentive scheme starts this month. But it
is lack of demand, not of funds, that is holding Europe back.