How a central bank’s policy can impact investments on the other side of the world

How do the European Central Bank’s monetary-policy decisions influence corporate debt levels in the U.S.?

The ECB’s purchasing of investment-grade, corporate, Euro-denominated bonds seemingly crowded Eurozone institutional investors out of such instruments and Eurozone investors increased their allocations to U.S. dollar corporate bonds soon after, according to a new paper by Kerry Siani, a PhD candidate in financial economics at Columbia University.

“There were global demand spillovers from the Eurozone to the U.S. dollar corporate bond market,” she says.

Specifically looking at initial issuances of corporate bonds, the paper found a curious phenomenon occurring among certain banks performing underwriting services.

Banks working as underwriters for U.S. corporations, which also have higher exposure to Europe, are creating an easier flow of capital from European investors into U.S. corporate bonds, she says. And these banks appear to benefit from the cross-Atlantic bid for U.S. dollar assets.

A U.S. firm that works with a European-exposed underwriter would benefit from the ECB bond-buying program and see a lower cost of capital. Moreover, Siani says she finds that firms that are more exposed to the Eurozone through their bank network actually issue more bonds following the start of the ECB’s bond-buying program.

Further, the paper found that the firms which respond to the ECB-bond buying program by issuing more bond capital don’t invest in operating assets as much as bond issuers do in normal times and in fact, responded by paying out more to equity-holders.

The paper was presented at the Northern Finance Association’s 2020 conference. The Canadian Investment Review is a proud partner of the NFA conference.