Investors are set to benefit from a quantitative easing ‘second wind’ which will create opportunity in the corporate bond sector, says RBC Wealth Management’s Hakan Enokssen.
With the European Central Bank’s QE stimulus having pushing government bond spreads to a new low on 16 April, the hunt for yield is becoming ever more problematic.
However, Enokssen, RBC WM’s head of fixed income, outlined how investors that buy debt in eurozone corporates can reap the benefits.
“One of the major things to look at will be the ECB’s inflation forecasts,” he explained. “The latest projections put 2017 inflation at 2%, which indicates that QE should continue in its current format. However, if that number starts going down we could start seeing the ECB investing in corporate and other bonds.”
Enokssen explained how investors stand to gain from the fall-out stemming from the combined implications of pension funds and banks’ debt-buying directives.
He said: “We expect further impetus in eurozone fixed income coming from two large investors into the government bond space – financials and pension funds.”
“Pension fund mandates stick to buying only AA-plus government bonds, so they have to stick to governments within the eurozone. Coupled with QE, that is likely to make demand quickly outstrip supply, and quite a significant part of the yield curve is already trading negatively.
“Financials have slightly looser mandates than pension funds and might trade out a bit, but they will hold on to quite a lot because of regulatory requirements. However, they have been forced out of the government space and are likely to benefit the corporate space, where we could see some second-round QE effects coming from what will effectively be a new asset class for non-traditional investors, bringing yields down in the corporate space as well.”
Enokssen continued: “We will see further compression in the corporate sector as investors are forced into buying corporate bonds instead of government bonds. Also, if we see broader QE success in the eurozone that will lead to economic recovery, which should benefit the corporate sector in general – particularly BBBs and financials.”
While consensus states that eurozone government bonds on the whole are unattractive, Enokssen believes that if investors cast their nets further afield there are some incentives.
“Eurozone peripheral bonds are interesting,” he said. “There are still elements of yield pick-up – the ECB is actively-buying bonds in the periphery, but cannot buy shorter-dated bonds and so is likely to push duration out further.”
