Why ECB corporate bond purchase will be more challenging than you think

Biggest announcement that has been rocking the market and acting as bullish for European equities is European Central Bank’s (ECB) inclusion of corporate bonds in its purchase program. Yields are dropping across the curve.

But in reality, simple math shows ECB’s corporate purchase unlikely to be big enough.

The reasons are:

What is the size of investment grade corporate bond universe in Euro Zone?

The total size as of now, stands at €1.623 trillion.

And when you exclude banks?

The size significantly comes down to €1.08 trillion. Still sizable.

But ECB will exclude subordinated debt, leases and non-Euro zone corporate 

The size of the market dramatically drops to just 554 billion.

The challenge doesn’t stop there.

Even in corporate purchase ECB is likely to maintain key capital contribution ratio, which means, if ECB choose to purchase €100 billion worth of corporate bonds, it will have to buy (approx.) –

• € 18 billion from Germany’s about € 110 billion eligible bond universe.
• € 14.2 billion from France’s about € 160 billion eligible bond universe.
• € 12.3 billion from Italy’s about € 40 billion eligible bond universe.
• € 8.8 billion from Spain’s about € 35 billion eligible bond universe.

Eligible universe is even smaller for other Euro Zone countries and these numbers are likely to go up when we recalculate the ratio excluding non-Euro area countries.

So key challenge for ECB at one hand will be not to disrupt the market liquidity. Without fresh issuance it will be harder for ECB to purchase corporate bonds more than 200-250 billion from secondary market.