04 Juli 2019
Not a done deal
Restarting QE is not a foregone conclusion. While we have no doubt that the ECB will resume QE if there are signs of deterioration in macro data, European indicators have shown some signs of stabilisation recently. As a result, unless the US escalates its trade war with China or Europe on auto tariffs, it is entirely possible that the data for the second half of 2019 improves compared to the first half of 2019, prompting the ECB to postpone the start of QE.
The size of QE 2.0 is likely going to be smaller than its previous iteration. At its height, the run rate of original QE purchases was about 80 billion euros per month. If the ECB engages in another round of QE, the starting run rate is expected to be around 30-50 billion euros. As such, CSPP 2.0 may not be a big market mover in current market conditions.
Supply will always meet demand
Even if CSPP 2.0 resumes, we might see investors’ increased risk appetite for credit met with further issuance, particularly from US companies. We have seen an uptick in such issuance over the last few years but 2019 might be a turning point. Firstly, we are seeing more US companies tendering USD-denominated debt to issue in EUR. Such issuers are not spread sensitive and are satisfied with the low coupons they get in Europe, and hence might be happy to issue even into a weaker market, weighing on broader market sentiment. Secondly, these companies are issuing bonds with longer maturities. Last week, for example, we had Medtronic issuing a 1-billion-euro 30-year deal, a first for a US company. This could also lead to market indigestion and cause credit spreads to underperform.
Market euphoria gives us pause for thought
Overall, while we have a positive view of European credit in the medium term, the short-term euphoria might be getting a bit out of hand. Memories of the sell-off in the government and credit markets in the first quarter of 2015 are still fresh in our minds, making us hesitant to participate too aggressively in crowded trades.
It is also worth noting that during the original CSPP, we invested in credits that we believed had a good fundamental story as well as attractive valuations and not because they were CSPP eligible. If CSPP 2.0 does indeed materialise, our approach is unlikely to change. We also take comfort in the fact that during the original CSPP, both eligible and non-eligible bonds performed well - CSPP was a tide that lifted all boats.
Central banks as dealers of last resort
We believe that corporate QE should become a more widely used tool by central banks everywhere. In a world where liquidity is at a premium and dealers’ balance sheets are not what they used to be, having a central bank that is willing to provide liquidity to the market participants (albeit at a price) should be an acceptable and ‘normal’ part of monetary operations. In effect, central banks should become ‘dealers of last resort’ and in this regard, the ECB is ahead of the US Federal Reserve by establishing the parameters of its corporate QE programme.
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