The European Central Bank (ECB) yesterday announced that it is extending its asset purchase programme (APP) beyond March 2017 but at a reduced monthly purchase rate.
According to Mario Draghi, the ECB president, this does not represent tapering, but many in the market took the opposing view, seeing pressure ahead in the peripheral bond market and high-grade credit.
The ECB has been buying bonds under the APP at a rate of €80bn a month since March this year, when it expanded its quantitative easing (QE) programme to include a wider range of corporate bonds.
Yesterday, the ECB announced it is extending its stimulus beyond March 2017 but that the monthly purchase amount from April until the end of 2017 will be €20bn lower.
It also reserved the right to increase the programme in terms of its size and/or duration, and changed some of the “parameters” of the programme – as of January, the minimum remaining maturity for eligible bonds will be cut from two years to one, and the ECB can buy assets yielding below the deposit rate, which is currently -0.4%.
Draghi was keen to stress that the ECB’s decision did not constitute tapering – “there is no question about tapering,” he said in a Q&A after the press conference – but many market participants think otherwise.
Mitul Patel, head of interest rates at Henderson Global Investors, said the announcement was initially interpreted as a hawkish surprise, and that the decision led to “significant volatility in markets”.
PIMCO’s view is that the ECB is tapering, according to Andrew Bosomworth, head of portfolio management in Germany for the firm.
“The ECB chose to purchase an additional €540bn of assets, which exceeds the €480bn stock implied by a six-month extension at €80bn per month (what the markets were expecting),” he said. “However, it will do so at a lower monthly run rate – and, at face value, that is tapering.”
But the decision by the central bank is “more nuanced than that”, he added, citing its reference to intending to “increase the programme in terms of size and/or duration” if conditions deteriorate and the open-ended nature of the decision.
He said PIMCO sees the ECB’s decision to “slow down” as reinforcing its cautious stance about investing in euro-zone countries with high debt burdens and low potential economic growth.
Chris Iggo, CIO of fixed income at AXA Investment Managers, said “there is a sniff of tapering in the air” and that “this should prevent bond yields from re-visiting the lows of earlier this year”.
BlackRock, according to Marilyn Watson, the asset manager’s head of global fundamental fixed income strategy, believes yesterday’s ECB meeting was “pivotal” for European bond investors, and that the plan to reduce the run-rate of purchases was “effectively tapering”.
“However, the ECB also noted that the size or duration of purchases would be increased if inflationary or financial conditions become ‘less favourable’,” she added.
Adrian Hilton, fund manager at Columbia Threadneedle Investments, described the ECB’s decision as amounting to “a ‘soft’ taper at most”.
He took this view “because the ECB retains its commitment to a presence in the bond market until a sustained path towards the inflation target is attained”.
“And they added asymmetric flexibility to increase – but not reduce – the purchase pace if necessary,” he said.
He said Columbia Threadneedle’s view was that there was still some value in German government bonds but that the asset manager was “much more cautious on the periphery, whose bonds have relied on the monthly purchases to keep spreads to bunds under control”.
For Bank of America Merrill Lynch (BAML) credit strategists, the ECB is clearly tapering.
“The ECB hawks were victorious,” they said.
They said it was unclear how the lower monthly purchase amounts would be split across the various asset classes – the ECB is buying public sector bonds and corporate bonds under separate programmes – but that it expected a €2bn smaller monthly average of buying under the corporate sector purchase programme (CSPP) from April next year.
But this is “not what the high-grade market needs”, they said.
They expect spreads to widen by around 20 basis points next year because of a shortfall of demand in connection with the ECB’s backing off.
The “losers”, according to BAML strategists, will be those corporates that have benefited the most from the CSPP – “10-15 year eligible bonds, especially the Spanish names; 7-10 year eligible UK corporates; and 15+ year eligible French corporates”.