Market Insider

What investors think of the ECB bond buying rumor

ECB may not pull QE trigger: Analyst
ECB may not pull QE trigger: Analyst

U.S. and European stock markets moved higher Tuesday morning on a Reuters report, quoting anonymous sources, suggesting the European Central Bank may buy corporate bonds in the secondary market in an effort to fight deflation. The ECB has subsequently confirmed to CNBC that "the ECB has taken no such decision."

But it's clear from the investors' response they think there should be a "YET" at the end of that sentence.

If the report proves true it will be a new front in the ECB's fight against deflation. Prior to this, the ECB said it would buy ABS, or asset-backed securities, under certain circumstances, in the primary market. In other words, upon issuance by banks, provided they meet a set of guidelines in terms of quality and risk.

Read More Europe shares rally on ECB stimulus hopes

Additionally, just yesterday, the ECB began buying what are called "covered bonds." This is the European version of mortgage-backed securities (MBS) commercial mortgage backed securities (CMBS) but with a key difference: Investors have a preferential claim in the event of default of the instrument. This adds another layer of safety and protection for the buyer.

As stocks moved higher, the Euro moved lower Tuesday, and the interest rates of Europe's more troubled economies fell following the Reuters report, which says the ECB could do so as soon as December. There are key questions if they take this step, including from which countries they buy corporate debt and of what quality.

More fuel for the speculative fire came from German Finance Minister Wolfgang Schaeuble, who said higher public debt and surplus global liquidity could be setting the stage for new asset price bubbles. But Schaeuble surprised the markets when he conceded the weaker euro was helping German exporters, in a comment seen as acknowledgement of the positives of central bank policy. He also reiterated the failure of European countries to implement reforms was contributing to economic weakness.

"Sparked by rumors that the ECB may begin buying corporate bonds as early as December, EURUSD's slump to fresh daily lows will only truly gain interest to the short side if it were to breach $1.2715," wrote Christopher Vecchio, currency analyst at DailyFX. "A catalyst, perhaps: German Finance Minister Schaeuble said today that a 'somewhat weaker Euro rate helps German exporters.' The ECB corporate bond buying rumor is one thing, but outright acknowledgement from a German official that a weaker Euro is welcomed is a downright shock."