Euro Corporate Watch – ECB will need to buy more in primary

by: Hyung-Ja de Zeeuw

  • The Corporate Sector Purchase Programme has been growing in relevance for the ECB’s asset purchase programme
  • Primary purchases form an essential contribution to the CSPP
  • We expect the ECB to announce an extension of the programme till September 2017 and assume it will not taper the CSPP. We think the size of the CSPP programme will eventually increase to 125bn in September, from an estimated EUR 75bn in March
  • Since the start the ECB has received an average allocation of 10% of all eligible supply. A growing relevance of the CSPP means this should be stretched to at least 15%

 

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It is becoming evident that the CSPP is growing in relevance

Since the start, the Corporate Sector Purchase Programme has clearly grown in relevance for the ECB’s Asset Purchase Programme. Its share has increased from 7% of total  APP purchases to 10% of total asset purchases in October. The growing relevance has a clear link with the declining share of the covered bond programme, CBPP3.

ECB Governing Council Member Ewald Nowotny indicated last month that the CBPP3 had reached its limits. Indeed, CBPP3 monthly purchases have on average amounted to EUR 4bn since July 2016, while this was EUR 6.8bn in the first half of the year. The drop is mainly caused by a drop in purchases in the secondary market due to declining market liquidity. In the first 11 months, most bonds were sourced in the secondary market. From October 2015 on, purchases in the secondary market dropped dramatically and primary purchases become essential for the programme. In the last few months, the primary purchases also dropped due to a stalling primary pipeline and the limit of CBPP3 is reached. During the programme, the share of primary purchases of total purchases reached 30%.

 

Primary purchases are also an essential contribution to the CSPP

We expect the ECB to mimic the CBPP3 approach in  the corporate programme. Here the relevance of the primary market is also increasing versus secondary purchases. In the first 5 months of the programme, the share of primary purchases as a percentage of total purchases has climbed to 14%. We expect that in the coming months, the primary purchases will grow to 20% of total corporate purchases. We think that a higher share of e.g. 30% like in the CBPP3, would put too much pressure on the corporate primary market as it requires a much higher allocation than the ECB currently receives.

 

We expect the ECB to announce an extension of the APP till September 2017 at  its December meeting and that they will not taper CSPP

Lately, discussions about tapering have emerged. We think these discussions are premature given that there is no sign of a pickup in core inflation and the drivers of core inflation in the future – such as wages – remain subdued We therefore expect the ECB to announce an extension of the Asset Purchase Programme from March 2017 to September 2017 at its upcoming December meeting. We also expect that the ECB will not taper the CSPP. This means that the corporate programme will increase in size. We estimate that the total CSPP will rise to EUR 125bn in September from EUR 75bn in March. This means that EUR 70bn will be purchased in 2017.

 

Since the start of the ECB has received an average allocation of 10% of all eligible supply. We think this should be stretched to at least 15%

In its latest press release, the ECB has communicated it holds EUR 38.1bn corporate bonds at the end of October. EUR 32.9bn of them were purchased in the secondary market and EUR 5.2bn in the primary market. Since the start of the programme in June, around EUR 50bn of eligible corporate paper has settled means that the ECB absorbed 10% on average of all new eligible deals. We think this should increase to at least 15% for the following reason.

As we wrote earlier, we expect that in the coming months the primary purchases will become more relevant to the CSPP just like in the covered bond programme. Therefore, we expect the primary purchases to grow to 20% of total corporate purchases. We estimate that next year’s total CSPP purchases will be EUR 70bn. This means that EUR 14bn (20% of 70bn) will need to be bought in the primary market. Our eligible supply forecast for the first 9 months of 2017 is EUR 85bn. If  the ECB needs EUR 14bn for its programme, the average allocation in new deals needs to grow to at least 15%. This means it will need to increase the order size in the order book if all parties receive a fair share.