Significant sales affected European corporate bonds at the end of last year in the general context of aversion to risk. The most risky assets have since recovered, with the surprising exception: European bonds have been rated by BBB. This segment of the European credit market is, in our opinion, attractive in relative terms, even though we maintain a neutral view of the entire asset class.
Difference in the yield range for European corporate bonds, 2014-2019
- Past performance is not a reliable indicator of current or future performance. It is not possible to invest directly in the index.
Source: BlackRock Investment Institute with data from Bloomberg and J.P. Morgana, January 2019. Notes: The lines show the difference in percentage points between the yield spreads of corporate bonds denominated in euro with different ratings. Spreads for each rating level are calculated in relation to equivalent German government bonds. The Euro Credit indices of J.P Morgan A, BBB and BB are corporate bonds.
BBB rated bonds represent the lowest level in the investment grade (IG) class; they are generally more affected than their better counterparts in market sales, but they are also recovering faster when sold. Bonds with the BBB rating recorded a significant outflow at the end of 2018, leading to higher returns. However, in 2019, they did not benefit from the rebellion that experienced other risky assets. The line at the bottom of the chart shows this disconnection. The difference between BBB rated corporate bonds and A (rated higher) was kept around high levels at the end of the year, instead of tightening, as it usually does during the volatility period. BB bonds, the least risky in the high yield or high yield group, overcame BBB and higher quality liabilities, narrowing the gap between their spreads (see line below). located at the top of the chart).
A favorable global context
The outflow of risky assets in December was triggered by fears of slowing global growth. Concerns about declining purchases of European Central Bank (ECB) assets have increased the negative impact on European credit. This year, in our opinion, the ECB should only buy 2% of European corporate bonds, compared to last year's 15%. It appears that the subsequent restitution of BBB-rated bonds is partly explained by the growth of BBB emissions by euro area financial companies in order to strengthen their balance sheets rather than worrying about the deterioration of ratings.
This high level of emissions can continue, but we believe that the European bond market as a whole, including the BBB class, should now have more favorable conditions for recovery.
Concerns about the recession in 2019 appear to be exaggerated (see Global Investment Outlook for 2019: 2019 Global Investment Outlook). We see a slowdown in global growth, although it is enough for the big central banks to expect, but they are not enough to end the current boom period. Euro area growth is expected to stabilize at a low level in 2019, thanks to an extremely accommodating ECB policy, further fiscal stimulus, and the disappearance of one-off events such as regulatory breaches. automotive industry. The ECB confirmed its policy last week as we expected. We share his view that the risks to growth are growing. In our opinion, the ECB's growth and inflation forecasts are optimistic, and rising rates in 2019 are unlikely. The US Federal Reserve Bank (Fed) should stay on hold until September. All this creates a positive global context for credit.
Medium-term threats to European unity, the still sluggish growth of the European economy and its reliance on trade lead us to caution about risky assets in Europe.
The medium-term threat to Europe, its still sluggish economic growth and its reliance on trade make us prudent about risky assets in Europe. In general, we preferred American bonds to Europeans because the Fed has already tightened politics. However, we believe that European corporate bonds rated as BBB are an opportunity for both US dollar and foreign currency hedge investors. The main risk that could arise could be the re-emergence of sentiment that does not apply to risk, and related outflows that would be triggered by fears of recession and geopolitical tensions. We need to be more optimistic about the growth prospects of the eurozone or the potential for solving political problems – including Brexit – to be more positive about the European credit as a whole.
In addition, for European bonds, we underestimate European government bonds, as we expect rates to rise gradually from the current extremely low level in the medium term.