Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The ECB’s Private Deals Are Distorting the European Markets

Stock-Markets / ECB Interest Rates Sep 09, 2016 - 01:42 PM GMT

By: John_Mauldin

Stock-Markets

ECB President Mario Draghi famously pledged to do “whatever it takes” to restore eurozone growth. His attempts to fulfill that promise have led to NIRP and other bizarre policies like the central bank’s massive asset purchases.

Whether the ECB’s interventions are helping the eurozone economy is not yet clear. But they are certainly having consequences. One is the appearance, if not the reality, of central bank interference and favoritism.


The ECB is making private transactions

The ECB’s corporate bond-buying program, for instance, was originally going to purchase already existing bonds on the open market. But, it has morphed into a kind of closed market in which a favored group of companies issues bonds tailored to ECB specs.

The ECB just went a step further and bought bonds directly from two Spanish companies through private placements according to a recent Wall Street Journal report. One was to the Spanish oil company Repsol and the other to Iberdrola—an electric power utility. Morgan Stanley acted as underwriter in both cases.

In other words, the ECB bypassed public markets and simply loaned money to selected companies. They weren’t even going to tell anyone.

Now, maybe the ECB had good reason to make these two private transactions. I don’t know, and they won’t say. But we shouldn’t have to wonder.

Here’s the reality. The ECB is buying so much of the corporate bond market in Europe that it became difficult for it to find things to purchase on the public markets. As a result, the ECB must look into the private markets.

False data from private purchases hurt investors

One of the great ironies is that European divisions of US companies are creating loans so they can get the ECB to buy them. It makes perfect sense from the company’s standpoint.

The problem is that this generates false market data that leads other players to make bad decisions.

Consider this chart from the Wall Street Journal. It depicts credit spreads of European corporate bonds. Lower numbers mean a tighter spread. This is good from the issuing company’s point of view because it means their cost of capital is lower.

We can see here that bonds eligible for ECB purchase (the green line) have consistently outperformed other bonds since the program launched. The advantage seems to be growing with time, too.

Are these bonds really better, or are they just getting the benefit of ECB’s buying—buying that could end at any time? Technically, we don’t know. There is no way to tell.

My guess? We will know when the ECB runs out of bonds to buy and starts having to loosen its standards as to what it can buy. Then we’ll see more corporate bonds become eligible.

If this new category of bonds sees its credit spread drop, too, we will know that the critical variable at work is not bond quality, per se, but the ECB’s purchases.

The ECB is digging itself a deeper hole

European bond investors don’t have clean data that will let them make confident decisions. Some will withdraw from the bond market, leaving the ECB even more of a monopoly purchaser than it already is.

That’s the opposite of what the ECB claims to want, but its strategy is making the problem worse, not better.

Join Hundreds of Thousands of Readers of John Mauldin’s Free Weekly Newsletter

Follow Mauldin as he uncovers the truth behind, and beyond, the financial headlines in his free publication, Thoughts from the Frontline. The publication explores developments overlooked by mainstream news and analyzes challenges and opportunities on the horizon.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in