The saying goes, “If the only tool you own is a hammer, everything looks like a nail.” The European Central Bank’s big hammer is the Asset Purchase Program (“APP”), which began in 2015. This program permits the ECB to buy up to 80 billion euros a month of public and private securities. The intent is to drive inflation up to the ECB’s goal of 2%.
How is it going? Pretty poorly, by the ECB’s own admission, as inflation continues to fall and is now on the verge of downright deflation. So what is a hammer-wielding ECB to do?
The latest swing is called the Corporate Sector Purchase Program (“CSPP”), which began in June. This program adds corporate bonds to the list of eligible securities under the APP. The ECB just released its first report under the CSPP, and it appears the bank is hammering hard. The ECB has purchased more than 440 corporate bonds, equivalent to about 8-9 billion euros a month. This is a massive boost to the European corporate market and is driving down corporate spreads. In fact, some high quality corporate bonds now trade with a negative yield.
It is no wonder foreigners are purchasing more U.S. corporate bonds, and in doing so are helping to drive our credit spreads tighter. So far this month, corporate spreads are 15 bps tighter than where we started July. We would expect spreads to be modestly widening at this point in the credit cycle, but the hammer continues to drop.
European Central Bank Inflation Metric
Source: BAML, Barclays, ECB