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What to Learn From the ECB’s Great European Corporate Bond Squeeze 

August 25, 2016

Richard Barley, The Wall Street Journal

The grip that the European Central Bank is exerting on the continent’s corporate bond market through its purchase program is almost palpable. But it isn’t clear how much more it might be able to squeeze the market before somebody gets hurt.

Since the ECB’s announcement of corporate debt purchases in March, yields on euro-denominated nonfinancial bonds have dropped precipitately, to the lowest on record. Investment-grade debt now yields just 0.52%, according to Bank of America Merrill Lynch index data, down from 1.28% before the policy was unveiled. While the total corporate purchases of €17.8 billion ($20.06 billion) so far are tiny next to the €980 billion of government bonds the ECB has bought, they have been bigger than many in the market expected.

But the relentless rally in corporate bonds has slowed in August. That may be simply down to sleepy summer conditions, with investors on the beach rather than at their desks, and markets more broadly becalmed. ECB purchases have slowed somewhat too. But it may also reflect the way that valuations are being pushed into stretched territory.

From one perspective, the spread between corporate and government bond yields still looks relatively wide. Read more

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