Is ECB buying corporate junk bonds?

In its March meeting, the European Central Bank (ECB) announced  a fresh package of stimulus and one measure of that package kicked off yesterday, corporate bond purchases (CBP). While announcing the guidelines, ECB said it will be buying bonds of European investment grade corporates other than banks.

However, at the first day of purchases, ECB picked up some junk-rated securities, namely Telecom Italia that is Italy’s biggest phone company but with a junk rating from Moody’s and Standard & Poor rating agencies.

Is the European Central Bank (ECB) deviating from its guideline?

Not exactly but it is definitely taking up bigger risk, while purchasing these kinds of securities. Telecom Italia is rated one notch below investment grade at Ba1 and BB+ respectively by Moody’s and Standard & Poor but the third rating agency ECB takes into account, Fitch has given the lowest investment grade rating to it.

A minimum requirement for ECB purchase program eligibility is an investment grade rating from any of the three.

Will ECB sell the securities, if Fitch downgrades it to junk?

No. At last meeting, the ECB President Mario Draghi clarified that ECB will keep the securities in its portfolio, even if it’s downgraded to junk after the purchase.

What ECB’s first day of purchase tells us?

It is a clear message that the ECB is willing to take up additional risk by buying bonds that are at the end of the spectrum.