This is How Draghi Will Sock it to Investors that Weren’t Invited to the Secret Meetings, by Wolf Richter

Fun, games, idiocy, and corruption at the European Central Bank (ECB). From Wolf Richter at wolfstreet.com:

They’re all getting ready for Wednesday.

Here’s what Draghi has accomplished recently: the prices of euro-denominated corporate debt have soared. The average yield of investment-grade debt is on the verge of dropping below 1%. A good part of the €916-billion market for corporate euro debt is already below 1%, according to Bloomberg. Highly rated corporate debt with shorter maturities is trading at negative yields, where brainwashed investors engage in the absurdity of paying for the privilege of lending money to corporations.

Companies, including US companies, are scrambling to take advantage of this free money: They issued over €50 billion of euro-debt in May, the second-busiest month on record. On Monday, at least six investment-grade and junk-rated deals were announced. One of them was Air Liquide SA, which sold €3 billion in investment-grade debt. Four of the five parts of the deal priced with a yield below 1%!

They’re all getting ready for Wednesday.

June 8 is the propitious day everyone has been waiting for: the ECB – which is already buying government debt, covered bonds, and asset backed securities – begins buying euro-denominated corporate bonds. Maturities will range from six months to 30 years. It will buy these bonds either in the secondary market, where previously issued bonds are traded, or in the primary market, thus handing its freshly printed euros directly to the companies (“helicopter money” for corporations).

“The prospect of average yields below 1% is very scary,” Juan Esteban Valencia, a credit strategist at Societe Generale in Paris told Bloomberg. “Investors are being pushed outside their comfort zone to sectors like high-yield debt, where they may not have expertise.”

And where they won’t be paid for the risks they’re taking.

So junk bond yields have plunged as conservative investors are getting pushed into risky paper with a good chance of default, though the ECB won’t be buying junk bonds under the current program. According to the BofA Merrill Lynch Euro High Yield Index, the average junk-bond yield fell from over 6% earlier this year to 4.16% as of June 6.

But investors that jumped on the bandwagon belatedly might be in for a rough ride. That’s how it always happened before.

It’s how Draghi does business. A decision is made in secret to buy a certain type of asset or to lower interest rates. That decision is then communicated in secret meetings to hedge funds and certain other market participants so that they can buy into those positions and start pushing up prices. The ECB has gotten into hot water over this when it came out, but hey, that’s how the ECB operates.

To continue reading: This is How Draghi Will Sock it to Investors that Weren’t Invited to the Secret Meetings

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