Yesterday was full of surprises for central bank watchers. And who isn’t a central bank watcher these days? There are two candidates for the biggest surprise of all. The first is that the ECB’s board put non-bank investment-grade corporate bonds on the list of assets eligible for its quantitative easing program.
Surprise surprise!
Does this mean the ECB is coming around to my way of thinking that high quality corporate bonds are a better long-term investment than sovereign government bonds? Probably not. For one, although I don’t have the exact figures handy, the ECB is buying quite a bit of the eligible sovereign debt issued by EU states as it is.
If it wants to keep credit spreads low and money flowing, it HAS to go find something else to buy. For traders, this is great news. Now they can front run the ECB in investment-grade corporate debt and enjoy a free ride. Yields should fall. Prices should rise. Easy money.
Do you see the problem?
The EU “solution” to a problem in the real economy is to create a speculative opportunity for profit in the financial sector. The benefits of lower borrowing costs aren’t realised in the real economy. It’s all a giant game to benefit people who have access to large sums of borrowed money, with which they can take risks that endanger the financial system and YOUR money.
It’s not great. But the corporate bonds call could be handy. There’s something to be said for being right for the wrong reasons. If you’re moving your money “down” Exter’s pyramid into the safest, most liquid asset classes in a highly-rigged system, it doesn’t hurt to have the world’s major central banks on your side.
Just don’t forget to have some diamonds and gold in your pocket (or your safety deposit box/sock drawer).
Category: Central Banks