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While the ECB has specified that it will limit purchases to investment grade bonds, it is assumed that an investment grade status from any of the three, or even four, main rating agencies7 will be enough to warrant eligibility, particularly if the ECB wishes to maximize the size of the eligible pool of purchasable bonds. This, of course, will include a universe of cross-over bonds, or ‘fallen angels’, that could be purchased.
Clearly the ECB is currently contemplating all of these issues, and more, and we should expect more clarity before the CSPP is launched by the end of June. However, it is equally likely that the ECB may choose to retain some degree of flexibility, particularly given the potential limitations and complexity of making largescale corporate bond purchases, in which case there may still be some unknowns even after the purchases begin.
The price sensitivity, or rather insensitivity, of the ECB (or NCBs) in executing their purchases is also a key factor for market liquidity. As broadly recognized, screen pricing for the corporate bond secondary market is largely indicative and, often, transacting in anything other than retail size11 will require accepting a price some distance away from the screen price. Trading in large blocks12, in what is characteristically a thin market, not only demands a degree of flexibility with respect to pricing, but may also take longer to execute, requiring splits into multiple orders. Given the unlikeliness of the ECB’s willingness to build its purchases through accumulating odd-lots, requesting offers in sizeable blocks of targeted bonds could be extremely market distortive. Unless, of course, it decides to take a more pragmatic and patient ‘axes-driven’ approach. Similarly, a strategy of aggressive bidding in the primary market, while a bonus for issuers, might only help further to ‘crowd-out’ traditional investors.