Why European Fixed Income Has Become More Attractive
Euro-area countries were struggling to achieve growth and inflation even before the coronavirus pandemic. Now global lockdowns and trade disputes have compounded their problems. Still, we believe euro fixed-income markets offer active investors attractive opportunities and worthwhile income.
Several key things are going right, in our view, with fundamental, technical and valuation factors all aligning to support euro bond investors.
Fundamentals Are Improving Following the Crisis
Euro-area governments have been resolute in addressing the spread of the coronavirus and—relative to other leading developed-market economies—have been quite successful. The virus is better understood, with eurozone countries having more tools to control future outbreaks and pave the way for a stronger recovery. Also, although the virus has hurt economies, it has strengthened political collaboration and burden-sharing in the eurozone.
The European Union (EU) recovery plan signals a new phase in eurozone integration, suggesting lower political risk. By comparison, political frictions are increasing in many other parts of the world—notably in the US, which is in a more volatile political phase with elections looming. Of course, we recognize that European integration remains a bumpy journey and that fiscal union is still a project for the future. But we believe the eurozone is emerging from the crisis in relatively good shape.
Policy Moves Make Technicals Extremely Supportive
The European Central Bank (ECB) remains committed to keeping rates low for the foreseeable future and to continuing the extremely supportive policies started by its former president, Mario Draghi, in 2012. That means maintaining and extending the ECB’s huge asset purchase programs, and so continuing to be a buyer of last resort for both euro-area government bonds and investment-grade corporates. The programs will also have an indirect positive effect on euro-area high-yield (HY) bonds by continuing to push investors further out on the risk spectrum, fueling demand for HY.