Significant sales of shares hit European corporate bonds at the end of last year in the general context of risk aversion. Most of the risky assets have since recovered, with a surprising exception: European bonds were rated BBB. This segment of the European credit market today, we believe, has an attractive relative value, although we hold a neutral view of the overall class of assets.
Difference in yields for European corporate bonds, 2014-2019
- Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in the index.
Source: BlackRock Investment Institute, data from Bloomberg and J.P Morgan, January 2019. Notes: The lines show the difference between percentages of yields of corporate bonds denominated in euros with different ratings. The rates for each rating level are calculated in relation to the equivalent German government bonds. Credit indexes J.P Morgan A, BBB and BB All-Maturity Euro represent corporate bonds.
BBB rating bills represent the lowest level in the investment grade category (IG); therefore, they are generally more affected than their better sales counterparts, but they also recover faster when sold. Bonds with rating BBB experienced significant outflows at the end of 2018, which resulted in higher yields. However, they did not utilize the recovery that they experienced other risk assets in 2019 so quickly. The line at the bottom of the chart above illustrates this disadvantage. The difference between corporate bond spreads that were rated by BBB and those rated by A (ranked higher in the rating scale) remained high at the end of the year instead of tensing it as it usually does in times of instability. At the same time, bonds rated BB, the least risky in the high yield or high yield category, surpassed bonds with BBB and higher bonds, with the difference between narrowing their spreads (see row below). is located at the top of the chart).
Affordable global context
Risks of risky assets in December are fueling concerns about slowing down global growth. The fear of a decline in asset purchase by the European Central Bank (ECB) has increased the negative impact on European loans. This year, in our opinion, the ECB should buy only about 2% of European corporate bond issues, compared to 15% last year. BBB's late BBB yields are partially explained by the rise in BBB's issue by financial companies in the eurozone in order to strengthen their balances and not the worries about worsening their ratings.
This high level of issuance could continue, but we believe that the European bond market as a whole, including the BBB class, should now benefit from more favorable terms for recovery.
The fear of a recession in 2019 seems overly (see our Global Investment Review for 2019: 2019 Global Outlook Outlook). We see a slowdown in global growth, though enough to keep the central banks in anticipation but not enough to end the current growth period. It is expected that growth in the euro area will stabilize at a low level in 2019, thanks to the highly adaptable ESB policy, further fiscal stimulus and the disappearance of one-off events such as regulatory disturbances. the automotive industry. Last week, the ECB confirmed its policy as we expected. We share his view that growth risks have increased. This, in our opinion, makes the ECB's growth and inflation rate optimistic, and the increase in rates in 2019 is unlikely. US Federal Reserve should remain at least until September. All this creates a positive global credit context.
Mid-term threats to European unity, the still slow growth of the European economy and its reliance on trade lead us to the precaution of European risk assets.
Mid-term threats to Europe, still weak economic growth and reliance on trade, make us cautious about European risk assets. We generally use US bonds over Europeans, as the Fed has already tightened its policy. We believe, however, that European corporate bonds have been rated BBB with both foreign currency hedging investors and euro-denominated investors. The main risk that could be achieved would be the re-emergence of feelings of reluctance to risk and associated outflows that would trigger fears of recession and geopolitical tensions. We must be more optimistic about the prospects for growth in the eurozone or the potential for solving political problems – including Brexit – in order to be more positive in terms of European credit as a whole.
In addition, European bonds are underestimated by European sovereign bonds because we expect a gradual increase in mid-term rates from the current abnormally low levels.