Concerned About the ECB Taper? Britain's Case Should Calm Nerves
By Jon Sindreu
For investors worried over the European Central Bank's plan to taper corporate-bond purchases from January, the example of Britain makes the case for remaining calm.
The once-lifeless sterling corporate-debt market was revitalized after the Bank of England announced it would buy bonds in August of last year. But the market continued its ascent to record levels of issuance even after the central bank stopped purchases at the end of April, despite concerns about Britain leaving the European Union.
Issuance of pound-denominated corporate debt amounted to GBP41 billion ($55 billion) between January and this month, the second highest on record after 2009--with some days to go--according to data-collection firm Dealogic. This is compared with GBP27 billion in 2016 as a whole and GBP23 billion in 2015, before the BOE launched its GBP10 billion corporate bond-buying program.
Furthermore, issuance remained steady after BOE purchases stopped. In November, 21 companies issued investment-grade rated debt in sterling, Dealogic data show, the highest number on record.
"Once the program ended there was actually zero effects seen, and we've continued to see a positive momentum in the sterling market even though the program ended," said Marco Baldini, head of European bond syndicate at Barclays. "It's left the market in a much better place than it was."
This should quiet the nerves of investors who saw central banks' meddling in bond markets as disruptive, and were concerned that it could crowd out trading among private hands. They feared that the end of these programs could lead to a choppy market once officials' deep pockets were no longer present.
While there are signs that something like this could happen in the thinly-traded eurozone covered-bond market, the experience of the U.K. suggests that the end of ECB purchases can be broadly more benign than previously thought.
It also suggests central-bank intervention can have long-run beneficial effects.
Before officials started buying corporate bonds as a way to cushion the potential impact of Brexit on the economy, the sterling market had been in decay for at least two years, with issuers moving to more widely traded markets denominated in U.S. dollars and euros.
The BOE's buying sparked new issuance and slashed borrowing costs for companies: According to Bank of America Merrill Lynch, the average spread between sterling corporate-bond yields and measures of risk-free borrowing fell from 1.9 to 1.6 percentage points right after the central bank announced the program.
"It led spreads to contract quite a lot, making it more attractive for borrowers to consider sterling, and that creates a lot more liquidity in markets," said Sajiv Vaid, a fund manager at Fidelity International. "It allowed investors to access a market that they were previously reluctant to enter."
The largest issuers in sterling this year were the world's biggest brewer AmheuserBusch InBev SA/NV, German auto maker Porsche Automobil Holding SE and American telecommunications provider Liberty Global PLC.
Even though many asset managers expected the boost to be short-lived, the spread is now 1.3 percentage points.
"Quite a lot of investors got positioned for a spread widening to occur and actually the market rallied," said David Riley, head of credit strategy at BlueBay Asset Management. "The lesson to take from that is that when the ECB tapers its corporate bond purchases it won't be as disruptive."
The pace at which the ECB will phase out its asset-purchase programs is one of the main concerns for investors in 2018. Eurozone officials currently buy EUR60 billion of bonds a month, of which roughly EUR7 billion are corporate debt.
In October, the ECB said the volume of purchases will be cut by half, starting in January, with corporate-debt volumes likely to fall by a similar proportion, analysts say.
The reaction of the sterling market, however, has left money managers feeling optimistic. Policy makers' promise that the taper will be gradual has also had a soothing impact: Risk spreads on eurozone corporate bonds are now narrower than they were in October.
To be sure, some money managers say the rebound of the sterling market has also been sparked by other factors, such as years of ultralow long-term yields in the eurozone and the U.K., that have driven corporate treasurers to lock in cheap borrowing costs for longer maturities.
This has led the average maturity of the euro-denominated market to increase to eight years, when in 2011 it was below seven, but also pushed some corporations into the sterling-denominated market, where maturities are traditionally much longer--they currently stand at an average of 15 years.
"The sterling market is probably the dominant pan-European market for long-dated issuance," said Roger Webb, fund manager at Aberdeen Asset Management, who remains heavily invested in corporate bonds across the board.
He doesn't believe the ECB taper will create a big disruption in the market.
"We don't really feel it is a material risk," Mr. Webb said.
Write to Jon Sindreu at email@example.com
(END) Dow Jones Newswires
December 28, 2017 03:14 ET (08:14 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.