By Harry Robertson
LONDON (Reuters) – Investors are returning to Europe’s corporate bond market after one of the most brutal years on record, lured by juicy yields and hope that central banks may soon abandon aggressive hikes interest rates.
According to data from Refinitiv Lipper, funds focused on investment-grade euro-denominated corporate debt have seen strong inflows for four straight weeks, even as Europe teeters on the brink of recession.
Net inflows were $1.17 billion in the week to November 9, the highest weekly amount this year.
BlackRock’s data tells a similar story. A net $3.62 billion was poured into BlackRock’s exchange-traded products that track investment-grade European corporate debt in the 30 days to November 17. The asset manager said it was a sharp rally that outpaced flows into government bonds.
“We are at the start of a rotation as investors move back into credit,” said Carolyn Weinberg, global product manager for ETFs and index investing at BlackRock. “Our clients buy government bonds and investment grade bonds.”
Chart: Flows into European corporate bond funds jumped – https://graphics.Reuters.com/EUROPE-BONDS/zjpqjknlnvx/chart.png
Underlying the renewed interest, investors are betting the pain of central bank rate hikes is almost over.
With the latest data showing US inflation cooling, traders are now expecting fewer rate hikes from the Federal Reserve, taking some of the pressure off the European Central Bank. This supported government bond prices, lowering their yields and boosting riskier assets such as corporate bonds and stocks.
The iBoxx euro corporate bond index has risen almost 4% since hitting an eight-year low in October, although it remains down 13% on the year.
HIGHER YIELDS ATTRACT INVESTORS
According to Denise Chisholm, director of quantitative markets strategy at Fidelity Investments, after a dramatic sell-off in bonds and equities in 2022 and inflation falling from dizzying levels, the stage is set for a rebound in two assets.
“We can see a situation where stocks and bonds are actually positive from a total return perspective over the next six months,” she said.
Higher returns are a big draw. Bond yields, which move inversely to prices, have climbed as bond markets tumbled this year. Now, investors can earn yields of around 4% or more on short-term bonds issued by companies with strong credit ratings, up from less than 1% at the start of the year.
The dividend yield on the STOXX 600 for example is below 3.37%, according to data from Refinitiv.
“For the first time in a very long time, you can get a decent real return by buying not only government bonds, but also higher quality segments of the bond market,” said Seamus Mac Gorain, head of the global rates at JPMorgan Asset. Management.
Goldman Sachs strategists recently told clients that one- to five-year European corporate bonds were “very attractive.” They said their price was more attractive than that of US corporate debt, with many investors overly pessimistic about the outlook for the European economy.
THE UNCERTAINTY REMAINS
A warm October lifted pressure on the continent’s energy system and sent natural gas prices plummeting, a move that should be welcomed by policymakers at the ECB struggling with inflation and governments that are struggling. struggling to help households and businesses cope with high energy bills.
“If you have a big drop in energy prices and gas prices at the margin, that’s helpful for corporate earnings,” said Mike Riddell, senior portfolio manager at Allianz Global Investors.
Still, for Riddell, government debt seems like a better bet than corporate bonds. He said Europe was headed for a darker recession than many investors expected and uncertainty was high.
“Even though gas prices have fallen very sharply, there are clearly major risks of even more supply shocks and even more increases in inflation,” he said.
Economic uncertainty means JPMorgan’s Mac Gorain is avoiding high-yield debt, issued by companies with lower credit ratings.
“We’re still a bit more wary of the lower quality segments of the credit markets, simply because we think recession is still the base case for next year,” he said. .
(Reporting by Harry Robertson; Editing by Emelia Sithole-Matarise)