ECB’s Draghi fires starting gun on corporate bond purchases in Europe

Bloomberg

The European Central Bank started buying corporate bonds on Wednesday, according to people familiar with the matter.
Purchases included €3 million ($3.4 million) of bonds sold by French utility Engie SA, along with 10-year notes from Telefonica SA, Spain’s biggest telecommunications company, and securities sold by Assicurazioni Generali SpA, Italy’s biggest insurer, said the people, who aren’t authorized to speak about it and asked not to be identified.
The ECB is adding investment-grade corporate notes to its €80 billion monthly purchase program, which already includes covered bonds, asset-backed securities and government debt, as part of efforts to encourage growth. The challenge will be buying enough bonds in increasingly illiquid markets, investors and analysts say.
“There is a fair amount riding on this in terms of the ECB’s credibility,” said Victoria Whitehead, a Paris-based senior portfolio manager at BNP Paribas Investment Partners, which oversees about €521 billion.
“The perception is that if they can’t buy at least €5 billion of bonds a month, the program will be seen as unsuccessful.”
Investors have piled into investment-grade corporate bonds on the promise of central bank purchases, driving up prices and cutting borrowing costs.
The average yield for euro notes tumbled to 0.98 percent on Tuesday, the lowest in more than a year, according to Bank of America Merrill Lynch index data. Companies responded to the surge in demand by selling more than €50 billion of bonds in the single currency in May, the second-busiest month on record, according to data compiled by Bloomberg.
While purchases of more than €5 billion of bonds may boost the market, investors may be disappointed if the ECB bought less than €3 billion a month, CreditSights analysts wrote in a June 5 report. Commerzbank AG and Morgan Stanley don’t expect the monthly purchases to surpass €5 billion.
“We’re worried that they won’t be able to buy quite as much as they want to,” said Tim Winstone, a London-based portfolio manager at Henderson Global Investors Ltd. which oversees about £93 billion pounds ($135 billion) of assets. “If the buying underwhelms and reported volumes are less than most people expect, there is a risk of a selloff.”
The ECB can choose from as many as 1,049 securities totaling €620 billion when it starts buying, according to data compiled by Bloomberg. CreditSights puts the size of the universe at about €628 billion, while Morgan Stanley estimates it is about €675 billion.
Euro-area national central banks will buy notes on behalf of the ECB in primary and secondary markets, according to the ECB’s website. Bonds issued by non-bank companies with an investment grade from at least one ratings provider will be eligible.
The French central bank has the widest choice of bonds to buy, with a third of the eligible notes falling under its remit, followed by Germany, Belgium and Spain, according to data compiled by Bloomberg.
The ECB will publish a list of its corporate bond holdings on July 18 and update it every Monday, according to the central bank.
Investors have previously been disappointed by other parts of the ECB’s bond-buying program. Securitized debt surged to the highest in more than seven years when the central bank announced plans to start buying asset-backed securities in 2014. They soon declined when purchases failed to meet expectations. Since the central bank started buying the notes in November 2014, it has accumulated just €19 billion of them.
“So much depends on the sizes of the purchases, which the ECB has been vague about on purpose,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “They might still be figuring out their approach.”

Euro’s global role slipped in
multipolar currency world: ECB

Bloomberg

The global use of the euro declined slightly in 2015 and early 2016 as China’s yuan started to take a larger role in reserves and trade in an international monetary system that is becoming more multipolar.
“The euro remained the second-most important currency in the international monetary system, but with a significant gap to the U.S. dollar,” European Central Bank President Mario Draghi wrote in the foreword of a report on the international role of the single currency published on Wednesday.
“The international role of the euro is primarily determined by market forces, and the Eurosystem neither hinders nor promotes the international use of the euro.”
The ECB’s unconventional stimulus measures, slower-than-expected policy tightening in the U.S. and a slowdown in emerging markets were the main drivers of the euro’s international usage, according to the report.
The single currency accounted for 19.9 percent of international reserves, down 0.6 percentage point. The dollar accounted for 64.1
percent.
The euro was also used in 29.4 percent of global payments, compared with the dollar’s 43 percent. Issuance of euro-denominated debt and cross-border loans declined.