Fallen angels and beyond

We expect fallen angels to be added by the ECB to their purchase programmes. On top of that, our economists expect the ECB to increase the size of PEPP by €500bn next week.

The ECB is behind the curve relative to the Fed in terms of support being offered to speculative grade.

The Fed is busy purchasing high yield debt offering support and financing needs, by utilising purchases through high yield ETFs, purchasing fallen angels and their main street financing facility. This has, in turn, opened up the primary market for junk bond issuance in USD. Meanwhile, the ECB is limited to investment-grade when utilising their corporate purchasing programmes (CSPP & PEPP). Euro high yield primary market issuance remains low for now, and the segment seems more exposed.

This leads us to ask the question, what will the ECB do?

• Add Fallen Angels
  Fallen angels have already been made collateral eligible, it would seem only a small step to now add these to purchasing programmes. Buying these fallen angels from investment grade to high yield will add much-needed support to the high yield market.
• Add High Yield ETFs & Entire BB
  As things stand, it is unlikely the ECB will follow in the Fed’s footsteps and add high yield ETFs, nor is it likely they will add the entire BB universe. The European high yield ETF market is relatively small in comparison to the US. Additionally, after just adding fallen angels to their collateral eligible list, they chose not to make other amendments to the eligibility criteria and for now, are unlikely to revisit.
• Add Senior Preferred
  At their last meeting, the ECB chose to add more support to banks by easing TLTRO terms and the introduction of PELTROs. However, we feel it is unlikely the ECB will take the next step and add senior preferred banking debt, despite it already being collateral eligible. If they had the intention to, why were previous opportunities not exploited, and additionally, the ECB has an oversight supervisory role, meaning there would be a conflict of interest.