ECB’s bond buying program
The European Central Bank (or ECB) didn’t announce additional stimulus measures at its April 2016 meeting. However, it did decide to begin buying corporate bonds in June 2016. The corporate sector purchase program (or CSPP) is aimed at improving the pass-through of bond purchases by the central bank. Currently, the ECB purchases bonds worth 80 billion euros from banks every month.
From June 2016 onward, the ECB will begin buying European high-grade bonds as part of its economic stimulus program. With the ECB kick-starting its bond-buying program, demand for European corporate bonds may rise, which would push their prices higher and their yields lower due to the inverse relationship between price and yield.
How US high-grade bonds would benefit
The increased demand for European bonds from the ECB could push yields down. This would attract investors chasing yields to US corporate bonds, as they offer the highest yields in the developed markets.
Issuances by high-grade corporates form part of mutual funds such as the T. Rowe Price New Income Fund (PRCIX) and the Prudential Total Return Bond Fund Class A (PDBAX). ETFs such as the iShares 1-3 Year Treasury Bond ETF (SHY) and the iShares 7-10 Year Treasury Bond ETF (IEF) also invest in high-grade corporate bonds.
In the next article, we’ll take a look at how yields and spreads have fared so far in 2016.