The market does not seem close to meeting such requirements. By mid-April, the securities included in Bloomberg’s Investment Grade European Corporate Bond Index delivered an average yield to maturity of 0.81%, with an effective duration of a little over five years (see graph for the performance of that index over one year).
And some analysts believe the fact that the ECB will step into the market could actually make corporate bonds less attractive for investors, even from a relative point of view. Jason Lejonvarn, the head of Investment Strategy at Mellon Capital, notes that the purchases of government debt by central banks have made them more expensive for investors. But now a similar phenomenon could affect corporate bonds, if the ECB purchases a large share of investment-grade bonds available in the market.
The actual consequences of the central bank’s incursion into the market, however, have yet to be seen, not least because information about the implementation of the plan remains sketchy.
The purchases should start at the end of the second quarter. Investment-grade corporate credit will be the target of part the extra money that the ECB will direct to its asset purchasing programme, which will increase from €60bn to €80bn a month. But it is not clear which bonds will be targeted by the purchases, or how much money will be earmarked to do that.
Ann-Katrin Petersen, an investment strategist at Allianz Global Investors, says the ECB’s monthly purchases of corporate bonds should be limited to between €5bn and €10bn. The remainder of the additional €20bn to be pumped into the market should be allocated to sovereign bonds, she says.
But issuers at least have not been deterred by the uncertainties. New issuance of investment-grade, euro-denominated corporate bonds accelerated after Draghi’s announcement, reaching €31.4bn in March alone, the highest monthly volume since January 2009, according to Dealogic.
Many companies have bet they would have to pay less than in previous months to attract buyers, and they were probably right in this view. M&G’s Wolfgang Bauer notes on the Bond Vigilantes website that, by early April, credit spreads of investment-grade corporate bonds issued in euros had fallen by an average of 20 basis points. Which is not particularly good news for investors looking for higher returns.
Some analysts also fear the effect the ECB will have on the availability of corporate bonds in the market. Petersen believes some €600bn worth of bonds will meet the criteria of the ECB’s corporate sector purchase programme, while Bauer puts the number a little higher at €640bn. But volumes could be higher as the ECB has indicated that the universe of eligible bonds could be changed in the future.
“We expect liquidity, which was already depressed by the shrinkage of market makers’ books, to be even lower going forward,” Borges says.
Higher returns
It is hard therefore to argue that the ECB’s new moves will make eurozone corporate bonds a must for investment portfolios in the near future. Roepstorff, for example, says there is more value in US investment-grade bonds, as they offer a little more duration and yield potential than their European counterparts.
Those looking for higher returns might feel tempted to venture into the high-yield universe, though that could be a tough sell for conservative investors in the current economic climate. If that is the case, however, the better strategy is probably to keep an eye on the eurozone to avoid surprises. Roepstorff says that because high-yield bonds in the US have more exposure to sectors that are cyclically exposed, such as oil and gas companies that are going through hard times, they should be treated with extra care.
“In the high-yield universe, we would look at the EU rather than the US,” he says.
And Peeters suggests that investors keen on a fixed-income exposure could veer towards long/short bond funds. “Those funds can profit from the current market volatility if they are flexibly managed,” he says. “They can still generate returns that are much more attractive – not very high returns, but with 2% or 3% one can be happy in the current fixed-income market.”
