Increasing primary market activity

Headlines

ECB lowers policy rate further and initiates purchase programme for asset-backed securities
Increasing primary market activity

Market commentary

With reporting season officially over and the Russia-Ukraine conflict maintaining the status quo, all eyes were on the ECB meeting on Thursday this week. Despite high expectations, Mario Draghi still managed to surprise the market with an impressive set of expansionary measures from the ECB toolbox. The main refinancing rate was cut from 0.15% to 0.05% and the deposit rate was halved from -0.1% to -0.2%. The announcement immediately had an impact on short-term rates throughout the continent. Notably the Irish two-year government bond rate closed at -0.006% on Thursday, thus negative for the first time in history. Furthermore, the ECB also announced a purchase programme for assetbacked securities (ABS) and covered bonds which, in our view, will have a greater impact on the credit market relative to the rate cuts. The ECB has not committed to a certain amount but aims to increase its balance sheet to a size similar to what it was in 2012 (cEUR4.2trn), implying that it will most likely set aside more than EUR500bn for the programme.

The credit market reacted positively to the ECB announcements with both ITraxx Main (Investment grade) and cross-over (High yield) grinding tighter week on week (c5bp and 15bp, respectively). More on ECB actions in our forthcoming Credit Outlook publication.

Primary market activity picking up

Primary market activity began to pick up again this week after the summer holidays, with issuance in most market segments. Demand continued to be strong in both investment grade and high yield names. In the sovereign space, the government of Portugal came to the market with a EUR3.5bn 15Y bond printing at mid swaps +235bp indicating very strong demand for peripheral debt. The Finnish high yield market kicked off following the summer lull with unrated fibre materials company, Ahlstrom, refinancing its 2015 bond with a 5Y bond, printing at mid-swaps +370bp.

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