The European Central Bank is investigating a move into corporate bonds, according to a report that has weighed on the euro.
Economists at Berenberg have looked at what a move into corporates — along with previously announced ABS and covered bond buys — would mean in terms of the size of easing.
The ECB will exclude uncovered bank bonds as it would face potential conflicts of interest as the supervisor. For the rest, the ECB will have to apply the rules of its collateral framework, i. e. require an investment grade credit rating. If we make a few more assumptions like (1) minimum issue size €150m, (2) Eurozone issuer, and (3) denominated in euros only, that would leave a potential targetable market of €800-850bn. The expansion could almost double the potential size of the asset purchase programme, making overall purchases of €500-700bn possible within in two years.
They say it would be an adequate and impressive further step.
-Berenberg note
The reason the market has dismissed a later denial is that buying corporate bonds makes sense, even if it has risks. Adding another 600-800 billion euros of potential QE could mean a quick end to the euro bounce, especially as more bad data continues to trickle in.
