Valentine Ainouz, credit strategist within the Strategy and Economic Research team of Amundi, explains why Euro credit markets’performance is disappointing and why the asset manager still consider them positively.
The announcement of a large-scale quantitative easing (QE) programme has amplified the easing of Eurozone sovereign bond yields.
The current German 10-year rate is positioned around 0.21%, a 23 bp decline since the QE programme was officially announced on 22 January. Conversely, the credit markets have not displayed any dominant trends since then.
The HY and IG indices hit their lowest point in late February, before spreading once again to return to their pre-ECB announcement levels. How can we explain these mixed performances? And why are we staying positive on the medium-term euro credit markets?
The credit markets’ disappointing performance can be explained by:
– The primary market’s strong trend
This surge in popularity weighed down the cash markets. Volumes of new issues on the IG segment total €120 bn year-to-date. This rebound in activity is tied to the arrival of US issuers, drawn by exceptionally low interest rates.
Thus non-eurozone companies make up half of funds raised over the first months of the year – a number well above the one seen in 2014.
This enthusiasm is also visible on the high yield market, with a spate of first-time issuers and issuers rated B or lower.
– The extremely low yields.
This limits the potential for spreads to tighten. The IG and HY yields are now at historically low levels (respectively: 0.9% and 3.8%).
The current pace of issuance reflects the willingness of corporates to take ad-vantage of low interest rates. This trend should continue in 2015.
Nonetheless, we are staying positive on the euro credit markets.
The ECB’s QE is truly going to change the game for euro bond markets. The additional €60bn in monthly demand for 19 months (for a total of €1,140bn) is a radical departure for the supply/demand balance on the euro bond markets.
Remember, the ECB’s purchases will be made in a market that is growing very slowly. Expansion of the euro sovereign market is slowed by re-strictive fiscal policies.
For example, in 2014 the net supply of long-maturity sovereign debt came close to €200 bn – a much lower amount than the €600 bn in sovereign debt purchases planned by the ECB.