How To Buy Corporate Bonds Directly – In June 2016, it launched its corporate sector purchase program, through which it bought corporate bonds in order to improve financing conditions for companies in the euro area. In this article, he argued that the program was successful. In particular, by raising prices and lowering yields in the target segment of the bond market, the program encouraged investors to shift their investments to similar but somewhat riskier bonds. This reduced borrowing costs for many companies, including those whose securities were not eligible for direct purchase by .
When interest rates are already so low that conventional cuts cannot further stimulate the economy, central banks can directly intervene in financial markets by buying assets from the sovereign and corporate sectors. That is exactly what they started doing in March 2015. In that month, they started buying assets issued by central governments, European agencies and euro area institutions. Then, in June 2016, it expanded purchases from the corporate sector through the Corporate Sector Purchasing Program, or CSPP.
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The objectives of the CSPP were two. The first was simple: point out that it was committed to giving more stimulus to the economy. The second was somewhat more complex. Through the CSPP, he wanted to lower the yield on the bonds that were earmarked for purchase. However, mainly through the operation of the so-called portfolio rebalancing channel, he also wanted to influence the prices of other assets, in particular those of corporate bonds.
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Eligible for your own purchases. In this way, they could support the financing conditions of all companies that borrow in the bond market (Draghi 2015, 2017).
The portfolio rebalancing channel works primarily through investors moving their investments away from the segment in which they are making purchases. The idea is that investors, faced with the shortage of eligible bonds due to asset purchases, are encouraged to reallocate their holdings to other riskier bonds. This “rebalancing” of the portfolio in turn leads to higher prices and lower yields also for bonds in non-eligible market segments (Vayanos and Vila 2009, Krishnamurthy and Vissing-Jorgensen 2011, Hancock and Passmore 2011).
While we know how the rebalancing channel works in theory, do we have any indication of how it works in practice? In a recent research paper, I address this question through empirical analysis (Zaghini, 2019). In particular, I analyze the evolution of bond prices and quantities in three different market segments after the implementation of the CSPP: bonds actually purchased, eligible bonds not purchased, and bonds not eligible. Below I describe the main findings of the article. The main conclusion is that the CSPP, through the portfolio rebalancing channel, has significantly reduced the cost of financing for companies in the eurozone.
In a nutshell, under the CSPP, the Eurosystem buys bonds issued by non-bank companies registered in the euro area, denominated in euros and that have at least an investment grade rating. It acquires them both in the primary market (that is, in issue) and in the secondary market.
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I examine the effect of the CSPP by looking at changes in corporate bond spreads (the difference between the real yield on the bond and an equivalent risk-free rate): if implementation of the program leads to a decrease in such spreads, it will succeed. to reduce corporate borrowing costs.
A first look at the evidence seems encouraging. Immediately after the announcement of the CSPP in March 2016, secondary market trading spreads narrowed in eligible and non-eligible market segments (see chart 1). Initially, spreads on eligible bonds narrowed faster than those on non-eligible bonds, suggesting a further improvement in financing conditions for investment-grade companies. However, in June 2017 the gap was significantly reduced, to the point of disappearing, which points to better financing conditions even for the worst rated companies.
Although the evidence in Figure 1 is revealing, bond spreads depend on many factors, such as the risk of the issuer, the amount placed, and the maturity of the bond. Thus, to isolate the spread component due to the CSPP, I rely on a model proposed by Sironi (2003) and Zaghini (2016) for the Eurozone primary bond market. The model takes into account a large number of link and company characteristics. In addition, it also considers the market conditions on the exact date of issuance of each bond. This allows the effects of the CSPP on bond spreads to be isolated fairly accurately.
Note: Adjusted spread of Bank of America-Merrill Lynch Options Indices. The Eligible index is the BofA-Merrill Lynch Index EUR non-financial companies; the Ineligible Index is the simple average of the BofA-Merrill Lynch EUR High Yield Index and the BofA-Merrill Lynch EUR Financial Corporations (Banking) Index. Source: Thomson Reuters.
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Empirical analysis shows that, following a large post-announcement signaling effect (in which spreads narrowed by 36 basis points), the effect of CSPP purchases on bond yields strengthened over time. In the first six months of the program, from July to December 2016, eligible bonds enjoyed a significantly lower spread (around 70 basis points) than ineligible bonds. This applied to all eligible bonds, regardless of whether or not they were purchased in the primary market by . On the other hand, non-eligible bonds registered a slight deterioration in their financing conditions. However, the gap between the two sets of bond spreads disappeared in 2017. Indeed, in the first two quarters of that year, ineligible bonds rallied significantly, with their spreads narrowing by around 50 basis points.
The spread dynamics estimated by the model is fully consistent with the theory of how the portfolio rebalancing channel works. In the first six months of the CSPP, he bought a large number of eligible bonds. In doing so, they increased prices (and consequently reduced spreads) in that segment of the market, crowding out other investors. Those investors then looked for ineligible bonds that are close substitutes but have a higher expected return. Due to increased demand for non-eligible bonds, that segment has also seen prices rise and yields decline.
In addition to the price dynamics, the changes over time in the amounts of bonds issued in the two market segments suggest that the portfolio rebalancing channel was operating. First, there was a significant increase in both the number of bonds and the total volume issued in the eligible market segment in the second half of 2016. This was followed by a similar increase in the non-eligible segment in the first half of 2017. While the first increase was driven entirely by additional demand for , the second was driven solely by the market and thus due to the operation of the rebalancing channel, since it only involved bonds that were not driven by .
The announcement and actual implementation of the CSPP provide a good case study of the effects of large-scale asset purchase programs. This analysis of the evolution of estimated bond spreads and amounts issued in the primary market shows that the program ended up influencing the entire corporate bond market.
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In fact, in a first phase the CSPP only had an effect on directly targeted bonds: immediately improving the financing conditions of eligible companies and progressively eliminating other investors in that segment. Six months into the program, the effect was extended to ineligible bonds. This was possible because the resulting shortage in the eligible bond segment pressured investors to rebalance their portfolios towards other similar but riskier segments, particularly non-eligible corporate bonds. In this way, the program had an effect on both segments of the market. As a result, it achieved a deeper improvement in the borrowing conditions of Eurozone companies.
De Santis, R. A., Geis, A., Juskaite, A., and Vaz Cruz, L. (2018), “The Impact of the Corporate Sector Purchase Program on Corporate Bond Markets and Nonfinancial Corporation Financing in the euro area”,
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