Latest ECB Stimulus To Boost Corporate Credit Market

The European Central Bank (ECB) has unleashed a monetary policy bazooka to lift chronically low inflation and boost the economic recovery. The package of rate cuts, additional asset purchases, and low-cost loans for the region's banks exceeded even the most bullish of market expectations. From a European corporate credit market perspective, the latest stimulus measures are particularly supportive – and here's why.

First, the ECB announced that as well as increasing its monthly asset purchase program from €60 billion to €80 billion, they will now include investment-grade corporate bonds. Although, we don't know the exact details of how much they will buy or what bonds will be included in the purchases, this is clearly a positive surprise. The market has reacted rapidly, and we anticipate further spread tightening going forward. For BBB- rated companies in particular, it provides an additional incentive to remain investment-grade in order to be eligible for the purchases. By contrast, A-rated corporates may use the lower yields and demand for corporates as an opportunity to engage in acquisitions and issue bonds to lock-in cheap funding for a long time. So irrespective of how a company is rated within the investment-grade universe, there's potential for it to reap benefits from this ECB announcement.

The new series of targeted longer-term refinancing operations (TLTROs) announced by the ECB is another key European-credit supportive measure. These four-year loans will be offered to banks at a deposit rate as low as -0.4% if certain conditions are met. In effect, the central bank will be paying banks to borrow if they meet certain lending criteria. Even if the conditions are not met, the terms are still attractive, with banks able to borrow at the refinancing rate of zero. This is undoubtedly positive for the region's banking sector and should help ease concerns about the impact of negative rates on banks' profit margins. It should also reduce liquidity concerns as the TLTRO provides funding for banks at extremely generous terms.

In all, the ECB's latest stimulus measures add to the reasonably supportive long-term fundamentals of the asset class. Europe remains in a credit-friendly part of the economic cycle, with inflation low, unemployment high and a moderate economic recovery. This should feed through into better earnings going forward. From a portfolio perspective, we continue to focus on bottom-up credit research to uncover the best opportunities for our clients, while maintaining a strong focus on risk management.

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