Press statement

The ECB versus the Fed – how do their asset purchase programmes stack up?

Munsbach, 11th May 2020 – For the last few months, capital markets and businesses alike have been struggling with the impact of both the coronavirus and the governmental measures put in place to contain it. To cushion the effect of this crisis on the global economy, central banks around the world have been progressively implementing countermeasures and the two most prominent of these institutions, the European Central Bank (ECB) and the Federal Reserve (Fed), now have their main tools to support the corporate bond markets in place. Given that the ECB and the Fed have each enacted different programmes to help steady the markets, it is worth looking at what these entail and whether there is a difference in the effectiveness of their measures.

A quick response from the ECB…

Since introducing the Corporate Sector Purchase Programme (CSPP) in 2016, the ECB has bought corporate bonds in varying amounts (although in 2019, it primarily only reinvested the maturing amounts). Following the rapid economic deterioration brought about by the Covid-19 virus outbreak at the beginning of the year, the ECB quickly used this existing programme to start additional purchases, which totalled EUR 11.9 billion between the beginning of March and 17 April 2020.

As the crisis continued and the stress on the bond markets increased, the ECB introduced a new programme, the Pandemic Emergency Purchase Programme (PEPP). With a total volume of EUR 750 billion to purchase public sector bonds, asset backed securities, covered bonds and corporate bonds, the PEPP was launched at the end of March and by 17 April had already purchased securities worth EUR 70 billion. While the majority of these purchases were of public sector bonds, the level of corporate bond acquisitions has so far reached approximately EUR 7 billion (in addition to those bought through the CSPP). Under the PEPP, the ECB is buying investment-grade rated corporate bonds on the primary and secondary market – all of which are denominated in euro and issued out of eurozone countries. However, we expect that the ECB will broaden its universe of asset purchases to include corporate bonds that dropped below the investment-grade category, as a result of downgrades related to the Covid-19 pandemic. This could include bonds issued by Schaeffler AG from Germany or the French company Accor, both of which are close to losing their investment-grade status, or from ZF Friedrichshafen, which has already dropped below investment-grade level. Should the ECB widen its asset purchases, this would mirror a move made by the Fed, which still includes issuers within its secondary purchase programme that held investment-grade status on 22 March 2020 but subsequently lost it.

…with the Fed not far behind.

In the wake of the coronavirus crisis, the Fed has set up two facilities to support the USD corporate bond market. The first of these, known as the Primary Market Corporate Credit facility (PMCCF), has a volume of USD 500 billion and serves as a funding backstop for corporate debt issued by eligible issuers. The PMCCF programme was set up to purchase bonds at issuance, in order to support corporate issuers in meeting their funding requirements. With a volume of USD 250 billion, the second programme, the Secondary Market Corporate Credit Facility (SMCCF), was established to buy eligible bonds - primarily investment-grade rated bonds with a maturity of four years or less. These issues need to be denominated in USD and the issuer must be domiciled in the US and have significant operations there. In addition, this facility can also invest in investment-grade and high-yield ETFs, with a focus on US-based issuers.

Yet, how successful are the programmes?

For both the ECB and the Fed, the goal of the purchase programmes is to keep funding costs for corporates at a sufficiently low level. In this regard, we can already say that both initiatives have been successful. The average investment-grade rated corporate bond yields at below 1.5% (euro) and slightly above 2.5% (USD). Through its SMCCF, the Fed is able to indirectly target long-term yields by buying ETFs, which themselves invest in long-dated bonds. The primary market is providing corporate issuers with the required liquidity, as the actual or potential central bank purchases - coupled with the knock-on effect from solidly performing secondary markets - is working. To enhance corporate liquidity further, the ECB has announced that it will also include commercial paper issued by non-financials in its permitted asset range.

While the Fed has not yet announced the start date for both of its facilities, its willingness to act has already reassured markets and led to much improved market pricing in recent weeks. The ECB, on the other hand, has already commenced purchasing, as outlined previously. It is important to note that, despite the differences in the programmes announced by the Fed and the ECB, we are seeing the same types of results. The reliability of the central banks and the trust investors placed in their willingness to act was a decisive factor in the success of the measures. Therefore, we expect investment-grade rated corporate bonds to continue to perform positively with further capital gains ahead.