CSPP in tapering times: what to expect in H2 2017 and for 2018?

The essential

EUR IG and HY corporate bond index valuations have stabilised at high levels. The EUR HY Index spread is now approaching 289 bp, or its highest since 2008, while the EUR IG corporate bond index spread is only 13bp higher than its all-time low of 89bp in February 2015. The corporate bond markets have been enjoying a more favourable economic climate and the support of the ECB. In this article, we look at the impact the tapering of the CSPP will have on the EUR corporate bond markets cycle can continue.

We expect a gradual phase-out of the QE programme next year. In our scenario, the ECB’s portfolio will reach nearly €170bn between now and the end of 2018 (22% of eligible debt). Once the programme ends, the ECB is expected to continue playing a major role by reinvesting the maturing bonds in its portfolio. Moreover, the valuation difference between eligible and ineligible debt is small, which reduces the risk of a sudden trend reversal once the ECB phases out the CSPP.