ECB said to be considering corporate bond purchases

Today’s surge in European equities is being attributed by some market commentary to reports that the European Central Bank (ECB) is considering the purchase of corporate bonds.

According to The Wall Street Journal Europe no specific plans have been discussed nor is there a timetable for when such a move might be decided upon. However, an earlier report from Reuters said the monetary authority could reach a decision as soon as next December, with purchases starting soon afterwards, in early 2015.

The announcement led to a 20 basis point drop in the iTraxx Cross-over index and in turn dragged Italian and Spanish 10-year bond yield lower by 10 basis points each, explains RBS’s Alberto Gallo.

Gallo cautioned that the plan is only under consideration, further pointing out how the European Central Bank in fact runs the risk – unless lending picks up – of either not being able to buy what it needs or it could gradually crowd-out other market participants.

He goes on to explain how investors seem to harbour doubts about the ability of the asset backed securities (ABS) purchase programme which has already been announced to work at the right pace, in turn possibly motivating the above deliberations.

“The plan would probably have an impact in lowering the Euro currency, but, in our view, it won't change the dynamics of lending and loan rates at the SME level,” Gallo adds.