Investment-grade corporate bonds issued in euros are the latest addition to a growing list of assets the ECB is buying as part of its 1.74 trillion euro effort (1.33 trillion pounds) to boost economic growth in the euro zone via lower borrowing costs.

The difficulty is that the 600 billion euro market for such notes is largely limited to big corporations in France and the Netherlands that already enjoy easy access to credit.

The ECB, however, is hoping its money will eventually trickle down to smaller borrowers across the euro zone for whom funding is still a problem. Since this is likely to take time, the ECB will increase the pace of its purchases only gradually and refrain from setting a monthly target, conversations with seven sources in or near the ECB's decision-making body revealed.

"There could be big fluctuations in buys but if we succeed in inducing issuance, that would naturally smooth out the market," one sources said. Another source said there might be months when purchases will be in the region of just 1 billion euros.

Eoin Treacy's view

A great deal of concern has been expressed at the record debt issuance by the US corporate sector which has been used to fund buybacks, dividend increases and to retire older more expensive debt. However Europe has an altogether different environment. Securitization is not nearly as developed while the corporate bond market is not as liquid as the USA’s. This has meant the ECB has been inhibited in what it can do because the market for the operations it wants to conduct is not large enough to accept the size of interventions envisaged. That represents a greenlight for any bank wishing to set up a securitisation or origination desk in the Eurozone because the ECB will buy just about anything they issue. 

For the banking sector the range of what they can post as collateral in order to receive balance sheet bolstering ECB backed paper continues to expand. Negative interest rates mean they have to pay for the privilege of accessing this high quality paper which has acted as a headwind for the sector. Despite the fact the ECB wants the banking sector to extend credit to the wider Eurozone economy, the extent to which that is achievable has been questioned. Banks are unwilling to increase costs to bolster their balance sheets, but without doing so they are unable to increase the credit they can make available. 

The Euro Stoxx Banks Index is testing the psychological 100 level which is close to the 2009 and 2011/12 lows. If the entire long range is to be considered base formation development the Index will need hold above the 2012 lows near 72. Near-term a sustained move back below 100 would be required to question current scope for additional higher to lateral ranging. 

Last night’s agreement to a framework which would allow Greece to draw down the next tranche of bailout funds while laying out how debt relief might be accomplished from 2018 (after the German general election in 2017) represents the removal of uncertainty and reduction in the risk premium attached to the Eurozone. That should help to act as a tailwind for the region’s stock markets. 

The Euro Stoxx 50 Index has been ranging with an upward bias since finding support in February and a sustained move below 2500 would now be required to question potential for additional higher to lateral ranging.