About three weeks ago, we said that “this chart definitely doesn’t show the ECB rescuing France.”
That was sarcasm of course.
While Citi argued that the deviation from the capital key shown above “wasn’t motivated by a desire to support the market around the French elections,” we thought the bank’s rationale for that contention was a bit lacking:
That just isn’t how QE execution works.
“That’s weird,” we said, “because here we thought that’s exactly how central bank intervention ‘works.'”
After all, if that’s not “how it works,” then what the fuck does “whatever it takes” even mean?
Good question, right?
Well as it turns out, BofAML smells a rat too. Read below as Barnaby Martin explains that “the ECB is more than just a ‘passive acquirer’ of assets [because] they are taking an active role in bond buying to manage the fallout from policy uncertainty.”
Back to the “golden oldies”
Ironically, after April’s taper, we may be back to talking about the supportive impact of central bank purchases yet again on credit markets. True, the CSPP buying pace looks to be down by around 20% versus Q1. But this still means Draghi will be acquiring somewhere between €6.5bn and €7bn of corporate debt per month until year-end. Put another way, the ECB could be buying around €50bn of additional corporate bonds in 2017 — enough to likely match all of this month’s issuance.
But we think the CSPP numbers may start to creep up again and catch the market’s attention. Given how chunky new issuance is at present, we doubt that the ECB can afford to pass up on primary buying, as it is a more efficient and less distortive way for them to acquire assets. This means that CSPP, in our view, could return to being a helpful credit market backstop. As Chart 1 shows, the ECB’s persistence with QE has finally pushed their balance sheet above that of the Fed’s.
But the ECB is more than just a “passive acquirer” of assets, in our view. We think they are taking an active role in bond buying to manage the fallout from policy uncertainty (and prevent a tightening in credit conditions that would ensue if they didn’t).
Chart 3, for instance, highlights the percentage of French corporate bonds appearing in the ECB’s weekly new ISIN disclosure (for CSPP). While it’s not a perfect measure, it does suggest that the ECB have been buying relatively more French credits this year. The motivation may have been to help stem volatility arising from the French elections. We think it also explains why French credits had such a small sell-off in the end during Q1 (and why we ended up being too bearish on the market).
Moreover, Chart 4 shows the ECB’s deviation from the capital key in PSPP, from our rates team. While they highlight scarcity as an important driver of high substitute purchases lately, note that around Brexit time there was a clear increase in peripheral government bond buying. And this year — especially in April — French government purchases have been noticeably more than the capital key implies.
Perhaps it’s no surprise then that market volatility — especially in credit — is close to record lows, given a central bank that is actively pushing back against volatility.