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2016-06-10 09:08:49
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.