Mario Draghi announced the ECB’s monetary policy actions on Thursday, June 5th, and on balance they were largely as anticipated. Without getting into too many details, the ECB launched a new series of “targeted longer-term refinancing operations”, began to set the stage for certain asset purchases, and lowered a variety of policy rates, including moving the deposit facility to -10 bps. We are not quite at QE in Europe, but they appeared to edge in that direction, and the ECB has made it clear that Deflation is a primary concern for the economy, even though it has returned to modest growth this year.
Credit markets reacted positively to this week’s data, including the ECB actions. Bank spreads seemed to be the biggest beneficiaries, with on-the-run banks tighter by 5-10 basis points. So far this month, we are seeing a complete reversal of last month, with higher rates, a steeper curve, and tighter spreads, especially on the long end. It was definitely risk-on in Europe – in addition to the ECB actions, Standard & Poor’s raised the credit ratings of a number of Spanish Banks, following a hike in Spain’s sovereign rating a week earlier. Rates in all of the peripheral countries in Europe have rallied like Luigi in a go-cart, and are trading at their lowest level in years. Spain and Italy, the two poster children for European chaos, saw rates drop by 20 basis points to 2.6% and 2.7%, respectively – just a hair above levels in the U.S.
The primary market did not wait around to see the data – as usual, the weekly calendar was front-end loaded, as few issuers wanted to take the risk of a bad outcome on the news front. Total supply was about $29 billion, which is a decent week. Large deals included Express Scripts, with $2.5 billion across three tranches, $2.4 billion of shorter paper from American Express, and $2 billion of an AT&T 30 year bond. Most deals are performing well, as most of the spread tightening this week took place on Thursday and Friday. The market is expecting more of the same next week – probably about $25 billion in supply.
There was a range of positive or at least benign data supporting credit markets this week, but we are inclined to attribute most of the rally to the ECB. At least for now, markets are expecting the announced policy measures to act like our own little Yoshi, gobbling up all the bad stuff – slow economic growth, deflation, weak banks – and turn them all into gold coins to toss back to Mario.