Credit where it isn't due

When Mario Draghi buys, it's time to sell. The European Central Bank (ECB) president's promise to buy bonds has caused corporate funding costs to collapse and distortions in bond and derivative markets. That's a sign the programme is working, and a reason to be nervous.

Draghi has a habit of making markets do his bidding, and the corporate bond version of his quantitative easing programme has been compliant. Since Draghi announced the corporate bond programme in early March, the average spread on corporate bonds rated Baa has fallen by 30 basis points, according to Barclays indices. Companies sold 103 billion euros of bonds in the single currency zone in March - the most since May 2007, Thomson Reuters data shows.

Read more from our special coverage on "BREAKINGVIEWS"

• Going South
• Car pools
• Hanging on
• Yahoove got Mail
• Game of armchairs

The programme isn't just about lowering costs, but changing behaviour. It is causing the difference between longer and shorter dated bond yields to compress. That may give companies greater confidence to invest. For example, the gap between 5 and 10-year bonds sold by Assicurazioni Generali has fallen by 40 basis points since March 1. And, as yields on corporate bonds fall, investors are investing more money in risky bank bonds, bankers say, which should feed through to lending rates.

There are signs of distortions too. One is the spread between bonds and credit-default swap (CDS) contracts that insure against a company failing to honour its debts. The CDS often pay a lower spread than their cash bond equivalents, a so-called negative basis. Yet the thirst for bonds caused by the ECB's programme is whipping the basis around. Accor's CDS are 10 basis points wider than its bonds; in early March they were about 50 basis points narrower.

The fall in spreads has been a boon for investors that poured money into bond funds after Draghi announced the programme. History suggests markets may get choppier when he actually delivers. In November 2014 covered bond prices fell sharply after the ECB started its purchases of the secured debt, as investors grew sick of expensive prices. More painful still was the so-called Bundshock in mid-2015, when markets front-ran the ECB's purchases, only to see Bund yields jump 40 basis points in four days, inflicting severe losses. The more extreme monetary policy gets, the more wary investors are likely to be.