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Dear ECB, What's in Your Wallet?

Last week the ECB reported that its balance sheet Expanded by €11.26 billion to €3.249 trillion.

What is the makeup? How has that increased over time? What is the ECB doing now?

ECB Balance Sheet Expansion Since 2007

ECB Balance Sheet Expansion Since 2007

Balance Sheet Makeup Year End 2015

Balance Sheet Makeup Year End 2015

The above chart from Europa, anecdotes by Mish.

Adventures in QE

On March 10 2016, the ECB announced it would start buying corporate bonds.

At that time, Bloomberg reported Next Stop on ECB QE Adventure: $980 Billion Corporate Debt.

The next target for the European Central Bank's expanding asset-purchase program: the region's 900 billion-euro ($980 billion) corporate-bond market. "This is no doubt a credit bazooka," said Lyndon Man, a fund manager at Invesco Ltd., which manages $737.5 billion.

Bang for the Euro

Today the Financial Times reported ECB Gets Bang for its Euro in Corporate Bond-Buying.

Prices of European corporate bonds have risen since the European Central Bank announced in March it would begin to buy them but, in what may be a sign of the effectiveness of the programme so far, the price of bonds purchased have risen further.

"It's working even more than you would anticipate," said Hans Lorenzen, global head of credit products strategy at Citigroup.

Shortly after it was announced, there was a rapid appreciation in the value of bonds predicted to be eligible, diverging from those judged outside the ECB's criteria. Companies rushed to sell new bonds, including a record €13.25bn offering to fund brewer AB InBev's takeover of rival SABMiller.

"We've had the risk events and the market doesn't seem to care," said Chris Telfer, a portfolio manager with ECM asset management. "Everything is trading like it's being bought [by the ECB] anyway," Mr Telfer said. "Fundamentals don't seem to matter; I don't know anyone who feels comfortable buying into this."

What did the ECB Buy?

ZeroHedge provides the answer to that question in his article So What Did The ECB Buy? "In Short, Almost Everything"

We went to the undisputed master when it comes to tracking what the ECB does in the bond realm (because the ECB is not buying equities just yet), BofA's Barnaby Martin.

Here is the big picture as revealed in his report today titled "CSPP: Buying Frenzy" - "in just over a month of the Corporate Sector Purchase Programme, the ECB have bought 458 bonds, with virtually no stone left unturned.

The best part was Martin's answer to the key question: "So what did they buy?" His answer: "In short, almost everything."

  • Since June 8th the ECB has bought 440 corporate bonds, which is around 35% of our estimated universe. By issuer, we find that the ECB has bought bonds from 158 different corporates.

  • The most popular bonds appear to be Deutsche Bahn (12 bonds bought), Telefonica (11 bonds bought), BMW (10 bonds bought), Daimler (9 bonds bought), ENI (9 bonds bought), Orange (9 bonds bought), Air Liquide (8 bonds bought), Engie (8 bonds bought), Iberdrola (8 bonds bought), Total (7 bonds bought) and Enel (7 bonds bought).

  • But in relative terms, we find that the ECB has bought relatively more of Snam (7 out of 10 eligible bonds have been purchased), Deutsche Post (5 out of 8 bonds), Repsol (5 out of 8 bonds), Total (7 out of 12 bonds), Telefonica (11 out of 19 bonds), EDP (5 out of 9 bonds), RWE (5 out of 9 bonds) and Deutsche Bahn (12 out of 24 bonds).

A glance through the individual names shows that there is very little that the ECB have held back on. In particular:

  • Names with "event risk" have been bought, such as VW, Glencore, EdF and Repsol.

  • Plenty of BBB3 rated credits have been bought, such as RWE, Metro, EdP, Renault, A2A, Pernod and REN (55% of names purchased were BBBs). Although not every BBB was bought - note that KPN and Alstom have yet to be purchased.

  • Foreign issuers have been bought due to their issuing entities being Dutch, for instance. For us, this underscores the point that we made a few months ago that CSPP is really "QE for the world". Plenty of Swiss credits have been bought (such as Nestle, Novartis and Adecco) as have UK credits (Unilever) and US credits (Schlumberger and Bunge).

  • The ECB even dipped into high-yield, buying bonds from Telecom Italia (Fitch rating of BBB-) and Lufthansa (S&P rating of BBB-).

ECB Bond Purchases by Ticker

ECB Bond Purchases by Ticker

ECB Bonds Held as Percentage of Total Bonds

ECB Bonds Held as Percentage of Total Bonds

What's Next?

The Wall Street Journal reports Draghi Stops Short of Pledging Fresh Stimulus

In its ECB policy meeting today, the ECB kept rates on hold. President Mario Draghi said the "ECB will reassess in September, when it will have fresh economic forecasts that factor in the impact of Brexit"

Mr. Draghi stressed that the ECB would closely monitor developments in the economy and financial markets, and that policy makers stood ready to act again, using all their tools, to support growth and inflation.

The International Monetary Fund on Thursday issued an "urgent" call for the world's largest economies to roll out more growth-boosting policies to avert a growing risk of a downturn in world-wide output. The fund urged central banks to "continue to use all available instruments to raise inflation, including negative interest rates."

Many economists expect the ECB to extend its bond purchase program, known as quantitative easing, at its Sept. 8 policy meeting. The program is currently due to end in March.

"We expect a six-month extension of the QE program to be announced either in September or in December," said Marco Valli, an economist at UniCredit in Milan.

Flexibility Exploitation

This Mario Draghi quote from today sums things up nicely: "Proper attention should be given to the evidence we've given in the past few months of our ability to exploit the flexibility that our [bond-purchase] program gives us."

In essence, the ECB threatens to corner the corporate bond market if necessary to stimulate growth. As with the Fed and Bank of Japan, there is no plan to ever sell these assets.

Draghi's plan has been such a success, the ECB keeps adding asset classes to its portfolio. What's next?


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