MSCI: Navigating Central Bank Intervention in Corporate Bond Markets
Posted: 1 June 2017 | Source: MSCI
Since the 2008 financial crisis, major central banks have purchased $9 trillion of bonds in efforts to reinvigorate the global economy. Government guaranteed securities comprise 96% of these purchases. Several central banks have purchased corporate bonds; the European Central Bank (ECB) is the largest buyer of these bonds and remains an active purchaser.
With signs of rising inflation, the markets are increasingly focused on central banks potentially tapering purchases and ultimately retiring their programs. Key questions facing institutional investors include: What has been the impact of the programs and what happens if and when the programs are eventually wound down? What are the implications for their portfolios?
We focus on the impact of the ECB’s Corporate Sector Purchase Program (CSPP). We find evidence that it has been a significant force in driving euro spreads tighter and stimulating corporate issuance. However, the benefits from the program have not been uniform. High spread (typically lower-rated) bonds have significantly outperformed lower spread bonds. The program also appears to have benefitted bonds that do not qualify, including bonds issued by banks and non-eurozone issuers.
We detect signs of a weakening impact of the program since November, suggesting that the market is starting to price in future tapering. In our analysis, we do not attempt to address the likelihood or impact of different tapering scenarios. Nevertheless, the strong performance of the euro corporate bond market since the launch of the CSPP suggests spreads could widen if the ECB scales back its programs faster than expected.
We also examine the impact of the ECB’s corporate bond program on a hypothetical credit value strategy in euro-denominated corporate debt. Our case study uses portfolio optimization tools to translate the strategy into a dynamically managed portfolio. We check to verify that portfolio bets and forecasted sources of risk were aligned with drivers of realized return.
The analysis highlights how the portfolio was re-configured in the face of the ECB’s corporate program, while performance attribution tools show how the strategy would have generated excess returns. While our case study is stylized and hypothetical, it provides insights into how real world asset managers may have fared during this time period of unconventional monetary policy.