Instead of sitting on the sidelines in 2017, take a look at Europe’s corporate bond markets. They could prove a beacon of stability in an uncertain world.
BRACED FOR A BUMPY RIDE
Sometimes 2016 felt like a white-knuckle ride as investors braced themselves for the fallout from the political shocks posed by Brexit and Donald Trump’s election in the US. In the event, financial market turbulence immediately after these events proved relatively short-lived. But huge uncertainties lurk beneath the surface calm—and have scope to trigger renewed volatility.
Against this backdrop, Europe’s corporate bond markets look like a relative beacon of stability in 2017. Whatever happens, European credit is going to benefit from three weighty ballasts: a highly supportive policy backdrop; solid investor demand versus the supply of bonds to buy; and European companies’ thrifty borrowing habits.
THE BIG ECB BACKSTOP
The European Central Bank (ECB) is firmly committed to keeping regional interest rates lower for longer—and is sticking with its quantitative easing (QE) bond-buying program. The pace of monthly purchases of regional sovereign, covered and corporate bonds will slow slightly from April. But the ECB is extending QE for an extra nine months so that it runs through to at least December 2017.
In addition, the ECB is tackling the technical challenge of finding enough eligible bonds to buy each month by including short-term government debt in the program, while also conceding that it may now buy negative-yielding bonds.
So QE will remain a crucial backstop for regional bond markets throughout 2017, putting a solid floor under euro-area bond prices and helping to anchor regional bond yields.
ISSUANCE LEVELS ARE MUTED
Supply and demand dynamics in European credit are a further positive. The vast majority of euro-area corporate borrowing is still funded by bank loans—by contrast with the US, where most funding comes from bond markets. European corporate bond issuance has been growing, but so too has demand from bond buyers seeking out higher-yielding assets as government bond yields have lurched ever lower. Buying demand continues comfortably to outstrip the supply available, which is positive for bond creditors and prices.