Since the European Central Bank started its purchases on June 8, Corporate Sector Purchase Program (CSPP) eligible bonds have been outperforming their non-bank ineligible counterparts, reports Goldman Sachs. Lotfi Karoui and colleagues examine the impact of the CSPP program on the secondary market in their July 13 research piece titled “The CSPP, one month on: Quantifying the market impact.”
Outperformance of CSPP-eligible bonds pool reflects price impact of ECB purchases
As detailed by ValueWalk, Bank of America Merrill Lynch analysts predicted in their April 21 report that the effects of the ECB’s corporate bond buying spree could be the equivalent of quantitative easing for the world. The BAML analysts believed that the ECB’s CSPP is a long-term commitment to ensure cheap and plentiful access to the debt market for a vast range of companies.
Karoui and team at GS point out that with the ECB now officially deploying its balance sheet in the EUR corporate bond market, the focus remains on the impact of the CSPP, both in the primary and secondary markets. The GS analysts believe that the CSPP’s announcement had roughly the same impact on non-bank EUR-denominated IG bonds, irrespective of their eligibility in the program. They highlight that since the ECB commenced its purchases on June 8, CSPP-eligible bonds have outperformed their ineligible counterparts:
The analysts note that since June 8, the CSPP-eligible portfolio has tightened by 6bp, while the ineligible one has tightened by 1bp. The following chart also suggests that after controlling for the cross-country variation between eligible and ineligible bonds, there was a slow “announcement effect” as the eligible bond portfolio remained tighter than the ineligible portfolio following the CSPP’s announcement on March 10. The GS analysts argue that the relative outperformance of the CSPP-eligible pool since June 8 truly reflects the price impact of ECB purchases, not differences in composition.
CSPP impact will likely fade
Karoui and colleagues provide insight into the sector, rating, maturity, and parent company country of risk breakdowns of the CSPP-eligible and CSPP-ineligible universes. The analysts note that aside from the parent company country of risk breakdown, both universes have fairly similar composition in terms of sectors, ratings and maturities:
To assess the magnitude and persistence of the CBPP3’s impact, the GS analysts examined the performance gap between covered bonds and senior unsecured bank bonds following the announcement of the CBPP3. They note that within a week of the announcement, the spread differential between senior unsecured banks and covered bond portfolios had widened by 7 basis points from 25bp to 32bp.
Analyzing possible reasons behind the fading impact of the CBPP3 after eight months, the GS analysts believe part of the diminishing returns could be attributed to the slowing pace of purchases over time. They point out that in the first full six months of the program, the ECB’s purchases averaged €11.7 billion per month, while in the most recent six months, the ECB could manage to purchase just €6.7 billion of covered bonds on average. Hence, the GS analysts highlight that the pace of purchases is slowing as bonds become harder to find.
The GS analysts argue that once the flow of purchases becomes predictable and supply scarcity begins to set in, the impact of the CSPP will likely fade. By using the third Covered Bond Purchase Program (CBPP3) as a guide, the GS analysts anticipate that by the end of the year, the pace of purchases will necessarily slow and the outperformance of the eligible universe will stabilize.