ECB: Quantitative easing has eliminated risk premia - Natixis

The ECB’s quantitative easing programme has squeezed risk premia on euro-zone peripheral government bonds, covered bonds and corporate bonds, according to Patrick Artus, Research Analyst at Natixis.

Key Quotes

“Is this virtual disappearance of risk premia on euro-zone government bonds a good thing?

• It corresponds to the "risk channel" of monetary policy: an expansionary monetary policy leads to a fall in risk premia, which stimulates investment. Given the structure of corporate financing in the euro zone, this would be a good thing if, by correlation, the risk premia on interest rates on bank loans also fell. But they have hardly fallen in 2016-2017, and remain higher than before 2012;
• We believe the disappearance of risk premia is dangerous in the medium term;
• Either risk premia remain low, and investors that have bought risky assets without receiving the corresponding premia incur losses when the risk materialises;
• Or risk premia return to normal, and it is this normalisation that generates losses for investors.”

“Investors will ultimately suffer from having bought euro-zone bonds whose risk premia have been squeezed by quantitative easing, either when the risk materialises or when risk premia rise again. Has this policy of squeezing risk premia had positive effects in the short term? For this to be the case, risk premia on bank loans to companies would also have to be squeezed by correlation, as euro-zone companies are financed mainly through bank credit. This has happened to a very limited extent.”