The European Central Bank has provided a fortress for the investment grade corporate bond market for much of the year. During that time, spreads, yields and new issue premiums have all crunched mercilessly downwards. But investors, long left with no option but to ride the tide, are fighting back.
Over the past two weeks cracks have started to emerge in issuers’ CSPP heaven. Deals have been pulled and the market’s elite, long cushioned by CSPP-eligibility, are paying elevated new issue premiums. This is a reminder of the simple truth that some proclaimed at the beginning of the market’s bull run: while the ECB can take a full 70% of a primary bond transaction if needs must, at least 30% of an order book comes from real money investors who seek satisfaction for a deal to work.
Those accounts are starting to push back against the grind. With some issuers’ secondary curves distorted beyond all reasonable calculation of fair value and increasing concern about duration risk, the ECB is no longer the only game in town. That creates a tricky environment for those credits that were the first to benefit when Mario Draghi announced CSPP, with pricing becoming an increasingly open forum for debate.
With the most recent published figures showing ECB scaling up its buying activity in primary markets, the QE engine still has juice in it. But making it run smoothly though will require more skill than before.