Next week, investors could find themselves presented with a few buying opportunities in the fixed-income space. Volatility is on the rise before the European Central Bank's monetary policy meeting, as this is when more details about plans to wind down asset purchases are due to be released. Analysts expect corporate bonds to be the winners of the central bank's shift in policy.
ECB President Mario Draghi said at the central bank's last monetary policy in September that "probably the bulk" of the decisions regarding the future of the quantitative easing (QE) program will be taken up in October.
Markets have been awash with speculation about how the ECB will wind down its asset purchases, with analysts advancing various hypotheses and then tweaking them as new signals emerged from the central bank.
Societe Generale's Anatoli Annenkov was expecting the central bank to cut down its asset purchases to €40 billion ($52.8 billion) a month from the current €60 billion, and those purchases to run for six months. Now, he expects the ECB to cut purchases to €25 billion but let them run longer, for nine months.
Other analysts agree that for the central bank it will be more important to spend longer in the market than to buy more bonds.
"There is a fine balance between the volume and the length of QE; the former primarily supports technicals; the latter primarily is keeping rates volatility suppressed and thus supports risk-taking appetite. We think the latter is key for fixed income assets," analysts at Bank of America Merrill Lynch wrote in research released on Wednesday.
These analysts believe the ECB will cut bond purchases to €30 billion and keep them up for nine months and that the central bank will adopt stronger forward guidance, perhaps by making it clear that reinvestments will continue at least until "policy rates normalization is well under way."
"This will ultimately control the selloffs and maintain a 'buy the dip mentality,' keeping volatility at low levels," they added.
Corporate bonds also could be supported because of the relative scarcity of high-quality government bonds that the ECB could keep buying. The bank is constrained by the so-called "capital key" -- it must buy sovereign bonds in proportion with the countries' contributions to its capital.
One way of reducing the ECB's asset purchases without creating too much volatility in fixed- income markets would be to maintain the amounts of corporate bonds it buys at their current level while reducing the amounts of sovereign bonds purchases. A story by Reuters in September looked at the ways in which the central bank can do that.
ECB data show it purchased around €8.0 billion of corporate bonds in August, taking its total holdings to €114.6 billion. That is a drop in the ocean compared to the €1.7 trillion of sovereign bonds on its balance sheet.
Judging by the state of European markets Thursday morning, it is unlikely to be smooth sailing between now and the ECB's meeting. The main stock indices in Europe fell and the euro lost ground as the complexity of challenges posed by the desire of Catalonia's leaders for independence from Spain and Brexit negotiations hit home.
The latest in the Catalonia saga is that the Spanish government moved to suspend the region's autonomy. An extraordinary meeting of the cabinet on Saturday is due to trigger article 155 of the Spanish constitution, which allows the government to take control of the region following approval by the Senate.
With volatility on the rise, it is now time for investors to research and create a shopping list of euro-denominated corporate bonds that, if they are brave enough, they could buy after the ECB meeting next week.