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Leaky ECB quantitative easing opens up value


The European Central Bank’s decision to buy investment grade corporate bonds as part of its monetary policy easing is rippling through credit markets. The spreading impact of the announcement of the programme’s details on 21 April is opening up relative value for investors in areas such as high yield.

The ECB’s announcement has provided a fresh tailwind to a sharp rally already under way in European bond markets, adding to a snap-back in risk appetite prompted by a recovery in oil prices and hints from the US Federal Reserve it would take a softer approach to tightening policy.

Investor positioning ahead of the ECB’s bond purchases is now fuelling further spread tightening in euro investment grade credit.

The purchase programme is widely perceived as creating a backstop to the European corporate bond market, but it is not intended to underpin the market, nor will it alter the fundamental credit quality of eligible securities. Rather, it introduces a large and price insensitive buyer into the market that is likely to be a disruptive presence, as central bank interventions often are. This situation may increase the likelihood of securities becoming mispriced and the prospect of volatility and, if so, it could create investment opportunities for value investors such as M&G.

As investment grade spreads grind ever tighter, investors are likely to seek returns further down the credit spectrum. Some of the corporate market’s biggest gains this year have been in sub-investment grade credit. High yield bonds, particularly those just below investment grade, have rallied sharply.

The concentration of gains among BB-rated corporate bonds is largely driven by expected demand from investment grade investors as they seek yield. But some of that market segment’s gains could be down to the fact that the ECB’s programme will offer further incentives for companies with high BB ratings to improve their balance sheets and seek BBB ratings.

And since eligibility is based on “first-best credit assessment”, some crossover issuers with an investment grade rating from one of the four eligible ratings agencies, could be eligible for purchases

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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