- The European Central Bank (ECB) has been purchasing corporate debt as part of its corporate sector purchase programme (CSPP).
- This program has created the expectation among investors of an “ECB put,” where the bank will provide liquidity and restore order to the financial markets in the event of a crisis.
- The data shows that the CSPP has had a lasting effect on European credit markets.
- The ECB has only purchased investment-grade (IG) debt, unlike the Federal Reserve, which also bought non-IG debt.
- The scale of the ECB’s bond buying and the confidence in its intervention have influenced investor perception.
- The option-adjusted spreads for European A-rated and BBB-rated corporate debt widened during the global financial crisis and the European sovereign debt crisis.
- Since the inception of the CSPP, spread volatility has decreased, indicating a potential ECB put.
- The models of corporate spreads published by major investment banks have historically tracked realized spread behavior.
- The implied spread widening in options markets has been less severe during market downturns, suggesting lower volatility and potential downside protection.
- There is limited evidence to support the existence of an ECB put, but the possibility cannot be ruled out.
Visit PankajSihag.com for the full three-part series.
