Invetors are set to be driven into selective financials and high yield debt due to the European Central Bank's continued activity in corporate bonds, AllianceBernstein’s Jorgen Kjaersgaard has said.
Citywire A-rated Kjaersgaard, who manages the AB Euro High Yield Portfolio, said, based on re-investments alone, the ECB will continue to absorb a significant portion of the available supply.
‘Over the last five years, average annual net issuance of non-financial euro-denominated investment-grade corporate bonds has amounted to around €110 billion, gross issuance amounts to around €245 billion.
‘This figure is likely to stay broadly unchanged - although the market could be impacted by fewer US companies issuing euro paper because of US tax reform: US issuers now account for more than 20% of euro-denominated investment-grade supply.’
By the time QE comes to its anticipated end in September, Kjaersgaard, who currently has 19.38% of the fund allocated to BBB credits, said the ECB could be holding a €175 billion corporate bond portfolio.
‘We expect the ECB will continue to reinvest maturities after this date - and these reinvestments could amount to anywhere between €10 billion and €25 billion per annum.
‘As the ECB tapers its QE programme from €60 to €30 billion-a-month, the volume of corporate bonds it buys under its Corporate Sector Purchase Programme (CSPP) is expected to remain largely unchanged.’
However, Kjaersgaard said challenges associated with the ECB’s government bond-buying criteria mean it will need to continue to turn to corporate issuance to fulfill its monthly €30 billion quota. This, again, pushes bond buyers into other areas.
‘As a result, we expect ECB corporate bond purchases to be around €5 billion per month this year, compared with €6-8 billion per month in 2017, despite the ECB having halved its overall QE purchases.’
Over the three years to the end of December 2017, the AB SICAV Euro High Yield Portfolio returned 15.58% in euro terms. This compares with a 17.79% rise by its Citywire-assigned benchmark the Bloomberg Barclays European HY 2% Constr TR EURU, over the same time period.