Don't Rush to Sell Eurozone Corporate Bonds on ECB Taper Fears

 | Apr 04, 2017 | 8:00 AM EDT
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We'll get to see the European Central Bank (ECB) account of its March 9 monetary policy meeting this coming Thursday, and there is some trepidation in the markets. Understandably, investors want to know how much further the ECB will go with tapering its asset purchases, which this month are lowered to €60 billion ($64 billion) a month from €80 billion.

One area of interest is that of corporate bonds, the purchases of which already have slowed considerably. According to Reuters, last week the ECB bought €1.5 billion ($1.6 billion) of corporate bonds, the lowest weekly amount since last December.

The ECB's corporate sector bonds purchases started on June 8 last year as a way to strengthen its monetary policy by pushing interest rates even lower as financing conditions ease. The central bank's data show that up to March 24 it had bought €73.8 billion of corporate bonds.

A significant slowdown in the ECB's corporate debt purchases would mean that bond prices would drop and yields, which move in the opposite direction, would rise. This is because more bonds would be left on the market and fresh issuance of corporate debt would find fewer buyers.

However, before you reach for that "sell" trigger, consider that such a scenario is unlikely. There are several reasons why. First, the central bank would not want to disrupt markets by slowing its asset purchases so sharply as to cause a crash.

Second, if we look at refinancing needs we see that corporate debt needs are largely manageable. A recent report by rating agency Standard & Poor's shows that $1.8 trillion in global corporate debt is set to mature this year and another $1.8 trillion in 2018. This refinancing need is set to peak at $2.02 trillion in 2021.

By region, companies in the U.S. have the largest share of this total debt, around 44%, followed by those in Europe with 38%. The rest of the developed world (Australia, Canada, Japan and New Zealand) have 11% and emerging markets 7%.

Looking specifically at nonfinancial issuers, the debt of which is being bought by the ECB, the vast majority -- 55% -- of nonfinancial debt maturing between now and 2021 is that of U.S. companies, followed by those from Europe with 30%.

Third, in a separate report the S&P experts have looked at the health of the eurozone corporate sector, and their findings are encouraging: "The balance sheets of eurozone nonfinancial corporations have improved considerably since 2013."

Since that year, companies in the single currency area have been running a large savings position -- meaning that their savings exceed their investment spending -- of around 3.4% of their gross value added (GVA), the rating agency's data show.

"This is unusual compared with positions before 2008, when companies were clearly in negative territory, averaging -2.6% of their GVA in the eurozone," the report said. So, companies today are much more careful about their borrowing habits than before the financial crisis.

Last, but not least, despite all the political uncertainty, there are multiple signs that the economic recovery continues in the single European currency area. Eurozone unemployment in February fell to 9.5%, the lowest level since May 2009. If that level still seems high, remember that the jobless rate was 12.2% in April 2013.

Manufacturing PMI was almost at a six-year high in March, when growth accelerated in Germany, Italy and France -- yes, France -- due to demand from both domestic and foreign clients. Meanwhile, inflation fell back to 1.5% last month, rather than rising, allaying fears that the ECB's tapering efforts would accelerate too much.

Viewed in a global context, the ECB's purchases of company bonds have been little more than a drop in the ocean -- albeit an important drop. Yes, they helped bring down interest rates and made things easier for all corporations, by contagion. But a gradual withdrawal would not break the market. Investors need to take that into account.

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