If you’re a bond trader in a European investment bank, the European Central Bank (ECB) is not your friend. Far from it: if you’re a bond trader in a European investment bank, the ECB has just made a bad situation worse.
The banking team at Bernstein Research has just issued a note explaining why this is. We’ve transposed their charts onto the page below. It comes down to the fact that the ECB is sucking up already thin liquidity in the European corporate bond market, and European banks’ traders are most exposed as a result.
1. The ECB just increased its ‘Asset Purchase Plan’ (Quantitative Easing) by 33% to include investment grade, non-financials, corporate bonds
2. The ECB could end up holding 16% of eurozone government and eurozone non-financial corporate bonds
3. & 4. The ECB’s QE programme for government bonds has already sucked liquidity from the market
5. However bad QE has been for the European government bond market, it could be much worse for the corporate bond market – where liquidity is already very low
6. As time goes on, the ECB is in danger of draining more and more liquidity from the European corporate bond market…
7. The ECB’s intentions with its bond-buying programme are based on a mistaken premise anyway…
8. Nor will new issues help plug the gap – investment grade bond issuance in Europe is likely to be down 15% to 20% this year
9. All of this will have a disastrous affect on FICC revenues, especially in Europe
10. Which is especially bad news for traders at banks like Deutsche and Credit Suisse, which are heavily exposed to the European fixed income markets