WANT A SENSE of the direction of travel for corporate bonds under the shiny new Corporate Sector Purchase Programme? I give you … drum roll please … CBPP3. When the ECB initiated its third covered bond purchase programme (which is still in operation), market participants groaned. Not just because they’d been targeted twice before but because they knew where this one was likely to end.
The ECB flooded the secondary market with orders and was the anchor buyer for qualifying new issues. Front-end yields in Pfandbriefe and other core markets turned negative; real-money investors ran for the hills in a fury, some vowing never to return; and issuers had to rethink their funding strategies to get around buy-side resentment. As real-money demand evaporated, issuers attracted technical buyers into their order books (banks buying for LCR so broadly yield-agnostic) to keep the central banks company. The market is not supposed to function this way.
Because artificial market pumping leads to what we ended up with the other day: Berlin Hyp selling a new €500m three-year Pfandbrief at a negative yield (-0.162%) – the first of its kind – but which still offered a 40bp pick-up to Bunds. No comment about the issuer here; fair play to Sven, Thomas and Bodo in the treasury team for getting the print and garnering €1.5bn of interest into the bargain! My point is that unorthodox monetary policy has truly led us to la-la land.
Has CBPP3 been a positive experience? No. Did it propel a transmission effect into the real economy? Give me a break. Just as CBPP3 changed nothing, adding euro-zone investment-grade industrials into the mix, as Mario Draghi did on March 10, will create a series of perverse incentives that will do very little to get the ECB to its end-game.
HERE’S ANOTHER THING: you get burned at the stake these days for coming out remotely in support of taxpayer-funded bank support or bailouts even as a concept. And in most cases rightly so. But then is it OK for the same policymakers to pay banks 40bp of our money to borrow from the TLTRO II window in the vain hope they’ll turn all gooey and start pumping it back to us (even for a profit) via corporate and consumer lending channels against the cycle and without positive underlying business drivers?
This may not be a case of taxpayers back-stopping bank solvency but it is – at best – taxpayers back-stopping bank profitability: my bank ain’t going to lend to me a negative rate (even if it’s less negative than the one at which it borrowed) to fund my conspicuous consumption. That way lies madness.
This is all even more perverse when you consider that at the same time as the public policy machine is juicing the banking sector with one hand, it’s doing everything in its power to undermine the banking model and its propensity to lend with the other hand. Regulators are imposing tough rules on capital, liquidity, leverage, funding, resolution and (in some jurisdictions) ring-fencing metrics and constraints, which are in aggregate leading to forced deleveraging, cost cuts and job losses. Chinks of light at the end of the banking returns tunnel are unlikely to emerge in many cases until 2018 or beyond. If at all.
The ECB should spend less time on technical band-aids and come up with more creative ways of creating sustainable growth – direct (zero cost?) SME lending, for example. Money transmission will be a demand-pull factor not a supply-push factor. Policymakers are pressing the wrong levers. Relying on technical factors like negative depo or zero refi won’t get us where Draghi wants.
Having the ECB and its massive cheque book standing ready to stalk every syndicate and bond sales manager on the Street to get paper in order to hit QE limits may cheapen borrowing costs. But European investment-grade corporates don’t need additional funding advantages; they’ve had it good for so long.
Core eurozone industrials yanked close to a quarter of a trillion of dollars equivalent in bond funding out of the market in 2015. How much of that has been invested in increasing capacity utilisation levels? Or investing in new plant? Or in product development? Or job creation? I don’t know the exact answer to any of those questions but we all know the broad answer is very little.
I do understand that from an efficiency perspective, refinancing and pre-financing opportunities are powerful market access drivers. But beyond technical treasury factors, relatively little cash has found its way into new investment.
I’m told we’re not at that point in the cycle. But if anything is going to force the cycle into the next phase, I would have thought free money is as good as anything else because the opportunity costs are lower. Of course, it depends on what you do with the free cash: what we have been hearing for some considerable time is that corporations have elevated levels of cash on hand and have been putting it work in vainglorious M&A activity and/or share buybacks.
I fear the ECB has done little more than encourage a financial engineering frenzy that will benefit the financial sector and the large corporates who don’t need any help. People may argue that covered bonds are not corporate bonds and the impacts and effects will be different. That remains to be seen.
A final thought: has anyone considered the great ECB unwind at the end of all of this?
