The latest round of quantitative easing (QE) announced by the European Central Bank (ECB) astonished markets by expanding its asset purchase programme and especially by including non-financial corporate credit among the eligible securities.
The measures announced by ECB president Mario Draghi on 10 March aim to help companies raise money for investments and, consequently, to promote economic activity.
As a result, it has also been a shot in the arm for the corporate bonds market, where investors flocked in the following days.
But has Mr Draghi’s announcement been enough to reverse the outlook for eurozone corporate bonds, which have been not been looking very enticing in the past couple of years? Not according to Tim Peeters, the head of securities portfolios at Portolani in Belgium.
“In the past two years, we started to reduce our fixed income allocation because we did not like the duration risk for the low yields that could be achieved,” he says. “Since then, the situation has not improved.”
Fixed-income investors have suffered in the eurozone due to record-low interest rates, which have pushed yields to the bottom. This is a long-term scenario the ECB has been unable to change with its latest monetary easing efforts.
That is why many investors are likely to carry on reducing their exposure to fixed income and look for returns in riskier assets such as equities, which offered some return in 2015 (although they have faced a bumpier road this year). Yields of eurozone investment-grade corporate bonds have hovered around zero for some time, and there is little expectation that this situation will change in the future.
But the ECB move may have turned corporate bonds into a more attractive option within the fixed income universe, and could, as a result, expand the presence of the asset class in investment portfolios that value a significant exposure to bonds as a diversification strategy.
Reducing volatility
“Probably the main implication of the extension of the ECB QE programme to investment-grade corporate bonds has been to reduce volatility in the asset class,” says José Luís Borges, the head of institutional portfolios at BPI Gestão de Activos.
“In a balanced portfolio, if you want to hold more corporate credit, you will allocate money out of cash and government bonds,” adds Claes Roepstorff, head of balanced product and portfolio solutions at Nordea Asset Management in Denmark. “In that framework, we tend to hold more corporate credit because of the support by the ECB.”
In Peeters’ view, however, yields offered by the asset class remain too low to justify the risk, even in the case of the highest quality representatives of the group. He says that in the current market it is only worth looking at short-term, low-risk bonds. Longer-term securities are less appealing, and it is likely a better idea to keep cash allocations higher than usual in order to take advantage of better opportunities when they eventually come around.
“In the short-duration space, investment-grade corporate bonds offer better yields than sovereign bonds,” he says. “But I will wait until long-duration investment-grade corporate bonds deliver around 2% before I have any intention to go there.”
