ECB corporate sector purchase programme: Expectations exceeded – Deutsche Bank

Research Team at Deutsche Bank, notes that the ECB has announced details of its upcoming corporate bond purchases.

Key Quotes

“Overall, the technical parameters of the programme have exceeded our expectations. We update our estimate of the size of the eligible universe to about EUR 770bn by amount outstanding and EUR 865bn by market value. In terms of monthly purchases, we increase our estimate from EUR 3-5bn to about EUR 5bn.

The ECB is going to take default-risk-management measures that include imposing some diversification constraints. We demonstrate how the eligible universe shrinks if caps on single-issuer exposures are applied. If the ECB aimed to passively buy a slice of the relevant benchmark portfolio but self-imposed a 2% cap on single-issuer exposures, the effective eligible universe would shrink by 9% to about EUR 790bn by market value. With a 1% cap, it would shrink by 36.4% to about EUR 550bn.

While we appreciate that this positive announcement signals the ECB means business when it comes to corporate bond purchases, it still remains to be seen to what extent challenging liquidity conditions in the corporate bond market allow it to buy in size.

We think the ECB will try to put a lot of emphasis on primary market purchases and rely on some "supply response" from eligible issuers. It is a brave new world in which a conservative institution that the ECB is has effectively moved to direct lending to global corporations.”