Trading activity in fixed income exchange traded funds boomed in the week following the European Central Bank’s announcement on 10th March that it would be including investment grade euro-denominated non-bank corporate bonds from euro area issuers under a new corporate sector purchase programme (CSPP).

ECB announcement stimulates corporate bond trading

Data from European-listed ETF trading platform Tradeweb showed that trading in fixed income ETFs increased to 50.3% as a proportion of overall traded volume. The majority of this, 62.9%, was in corporate and high yield bonds, with ‘buys’ in corporate bond ETFs nearly double the amount of ‘sells’.

Measures from the ECB include further interest cuts, a new round of cheap loans to commercial banks, and expanded asset purchases, which will now include non-financial corporate bonds. Full details of the CSPP have yet to be released and the programme will not start until the end of Q2, 2016.

James Butterfill, Head of Research and Investment Strategy at ETF Securities, said “The ECB package includes purchasing of corporate bonds by the ECB and investors are likely anticipating this. It implies that the ECB has become the buyer of last resort for corporate bonds. Buying corporate bonds will push the prices up and the yields will fall.

“The move means that it is cheaper for a company to fund itself now. The stimulus is to prompt companies to go to the bond market because it is cheaper. One of the problems with the QE programs so far is that the transmission mechanisms haven’t worked, for example, bank lending hasn’t picked up. In theory this move by the ECB will help the low rates we are currently seeing transition down to the real economy, which is you and I,” said Butterfill.

Further data from Tradeweb showed that between 14 March and 16 March, activity in fixed income ETFs climbed even higher to 51.5%, with corporate and high yield bond products accounting for 36.7% of the volume traded in fixed income ETFs.

Brett Pybus, Head of iShares EMEA Fixed Income Product Strategy, explained that following the announcement there was a strong rally in euro corporate bonds with elevated trading activity and strong inflows in the provider’s related ETF product suite. “This was particularly evident in iShares Euro Corporate Bond and Euro High Yield ETFs which combined have seen inflows of approximately $1.2bn over that past week.

“Inflows and heightened activity extended beyond fixed income ETFs containing bonds eligible for purchase to areas of the market such as European High Yield and dollar based corporates as investors anticipated a crowding out or trickle-down effect and sought to add risk to their portfolios,” said Pybus.