The European Central Bank’s programme of bond buying has led to a deterioration in market liquidity, Bank of America Merrill Lynch finds.
Data from the bank shows that since the ECB expanded its bond buying programme to include corporate bonds, market liquidity has actually decreased.
“We see signs that since CSPP [corporate sector purchase programme] buying began in earnest on June 8, credit market liquidity has actually deteriorated. Brexit has of course transpired in the meantime, but nonetheless bid-offers for investment-grade bonds have been moving higher,” the BofA Merrill Lynch global research report states.
“So while the aim of CSPP disclosure was to preserve credit market liquidity, the initial signs seem to point to something more worrying: that the ECB’s dominance in corporate bond buying is in fact becoming counterproductive for market health.”
Disclosures from the ECB on its bond buying show it now has “creeping influence” in almost 70 per cent of corporate bonds eligible for the programme, the report states.
“While disclosure is meant to alleviate concerns over market distortion, we fear that it couldmake eligible credits more illiquid,” the report states.
As a result, BofA Merrill Lynch expects investors to move allocations away from European corporate bonds, to shift away from the eligible corporate bond market.
It suggests moves will be seen into corporate hybrids, US investment grade, European BB-rated bonds and bank bonds.