The European Central Bank kicked off its corporate bond purchasing programme in June, but forward-looking investors are already turning their attentions to the central bank’s September meeting.
With growth and inflation remaining stubbornly low, the consensus among market commentators ahead of today’s meet-up is there will be strong words but little action from Mario Draghi.
One of the most hotly-tipped tactics, even if the size of purchases is not increased, is to extend the €80 billion-per-month purchases of government and non-financial corporate debt beyond its existing end date of March 2017.
But how are bond managers shaping up ahead of this latest policy summit? Citywire Selector spoke to three highly rated fixed income specialists to find out.
Extend beyond the ECB
Citywire AA-rated David Stanley, who runs the T Rowe Euro Corporate Bond fund, has adjusted his exposure in the wake of ECB action but believes investors may need to look at longer-term opportunities.
The bond buying programme is exceeding expectations in size. I think the current total is over €18 billion - that certainly surprised the market in its ability to buy bonds. Obviously spreads tightened on the announcement of the programme and continued to tighten as they have been buying bonds so they have been pretty successful in achieving a pretty large amount.
The question is at what stage do you start moving out of some of the Corporate Sector Purchase Programme (CSPP) eligible bonds into the non-eligible bonds and pick up yield? There are cases of even potentially going up in credit quality and still picking up spread by going from eligible to non-eligible bonds.
There is no magic answer as to what number is appropriate to making those switches, I'm not inclined to do so yet, but I think at some stage we may get to that point where we are looking to increase non-CSPP eligible exposure. It's not to increase yield or spread potential, but after CSPP-eligible bonds have come in so much there is probably very little room for them to tighten more.
Guidance to give
Michael Krautzberger, Citywire A-rated manager and head of European fixed income at BlackRock, believes an extension is inevitable, if only to calm uncertain markets.
So far the ECB has confirmed that the programme would run at least until March 2017, but we feel that in the next few meetings the ECB will make clear that it will probably be longer than March 2017. If they were to prolong it for half a year, or even to the end of March 2017, that's a possible concrete announcement for Thursday.
We don't think they will move the interest rates on Thursday. Things have slightly stabilised on credit conditions compared to one or two months ago and recent data from the UK has given a little bit of relief on the Brexit front. If the ECB was to announce an extension of the QE programme, this would calm the market a little bit.
However, if they were to wait too long, and we start to approach the end of the year, the market could get nervous. Central banks always say they try to be predictable, and so in that sense I think it would be quite sensible to give guidance as to whether the programme will run beyond March. That will contribute to the good sentiment in the market.
Eyes on equities
Equities could be next on the agenda for the ECB, according to Citywire AA-rated Mondher Bettaieb of Vontobel, who is also backing an expanded timeframe.
I don’t think the ECB is likely to increase the amount of its purchases but they are likely to extend the QE programme for maybe six to nine months more. Maybe he won’t do this today but it likely will happen before the end of the year. There is not a lot of positive directionality for inflation and inflation is not picking up at the pace the ECB would want it to pick up. As long as it does not pick up they will continue to purchase bonds both in the government and corporate markets.
Financials are already covered through the TLTROs, so they could potentially expand the scheme to include equities. Not right now but this is something they could definitely look at further down the line and especially if inflation does not pick up, that is when I believe they could start to consider equities as an option.
The new issuance market is looking to pick up as it was relatively quiet over the summer. There was primary issuance but the secondary market was very quiet as investors were keeping cash at hand. This could see investors come more into the market now and that will coincide with ECB activity and a bit more issuance coming to market as well, so the new issuance should be easily absorbed and is unlikely to derail the spread tightening trend.