By Anna Hirtenstein 

The European Central Bank is ramping up its corporate-bond purchases, increasing its support for the region's companies as weaker economic data weigh on credit markets.

The central bank bought EUR2.6 billion, equivalent to $3 billion, of company debt in the week ended Sept. 25 -- a third more than the previous week and over three times higher than the last week of August, according to ECB data. Since the market turmoil began in March, it has increased its corporate bondholdings by close to EUR40 billion.

The purchases have channeled funds to the energy sector, as it bought hundreds of bonds of oil-and-gas companies such as Royal Dutch Shell PLC, Total SA and Eni SpA, as well as from some of Europe's largest utilities such as France's Electricite de France SA and Germany's EON SE.

The central bank has also been active in transport, snapping up debt from airports and highways in Italy and France, as well as Airbus SE and International Consolidated Airlines Group SA, which owns British Airways. Auto makers have been another major recipient, with purchases of bonds issued by BMW AG, Daimler AG, Fiat Chrysler NV, PSA Group, Renault SA and Volkswagen AG.

While the ECB generally seeks to buy bonds evenly across the broader market, it may buy more of certain bonds if it thought a sector "was coming under pressure and had downgrade risk," said Stephen Caprio, a global credit strategist at UBS. "They'll likely have been a bit concerned by some of the corporate bond volatility we saw in March with spreads blowing out."

The European Commission approved a EUR750 billion coronavirus-relief fund in May, which is likely to start to pay out next year. The ECB in March announced a EUR750 billion bond-buying program for government and corporate debt, increasing it to EUR1.35 trillion in June.

These moves have kept some parts of Europe's credit market relatively stable at a time when volatility has returned to global markets. The ECB has a mandate to only buy investment-grade bonds and its demand has kept yields low both in the primary and secondary markets.

The areas where the ECB isn't present, such as the high-yield market, are showing signs of stress. The ICE BofA Euro High Yield Index has been largely ticking up over the past two weeks. It widened 0.2 percentage point over the past seven days.

"Economic data has been coming in weaker than expected," said Andrey Kuznetsov, a credit portfolio manager at Federated Hermes. "It's encouraging investors to think about all the risks we're facing until the year end -- the pickup in Covid cases, more stringent social distancing measures in Europe."

Data that tracks the health of the eurozone's services industry through purchasing managers' indexes fell below expectations last week and showed a contraction.

Mr. Kuznetsov is more cautious about the high-yield sector in anticipation of defaults and is buying subordinated debt of Europe's investment-grade companies, a type of bond whose holders are second or third in line to be repaid in the event of a bankruptcy -- and one the ECB doesn't buy.

"You have to reach for yield and this is one way to do that. You take on the subordination risk but you're exposed to a corporate that has a lower probability of default than in high yield," said Mr. Kuznetsov. "The support from the ECB has led us to considering more opportunities outside of eligible assets" for their bond-buying programs due to the pressure it puts on yields.

Coronavirus infections have climbed in many European countries in recent weeks, amid a shift to colder weather and following a period of looser social-distancing measures. Several governments have recently renewed some restrictions, including Germany, France and Spain.

"The last quarter is going to be a bit more difficult, we're going to continue to see the economy recover but the bounce is not going to be as strong," said Jon Jonsson, a fixed-income portfolio manager at Neuberger Berman. "There's a lot of unknowns around how the Covid spread plays out."

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

(END) Dow Jones Newswires

October 01, 2020 04:36 ET (08:36 GMT)

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