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EUR corporate bonds: a cross-check on valuations


The essential


Undoubtedly, the CSPP announced one year ago by the ECB has to some extent remodeled European corporate bonds into a more stable and risk-off resilient asset class with respect to its historical experience and relative to other segments of the fixed-income market. In the past few months, both HY and IG spreads have tracked the firming momentum of macro and micro trends and followed very closely the fall of implied volatility in equities. As a result, they have decoupled from rising sovereign debt risk premiums, the latter led higher first by uncertainties following the result of December Italian referendum and more recently by other upcoming elections, the French ones in particular.


In this piece we analyze the links between credit markets and trends of their major drivers, focusing on relative value with alternative asset classes within the Euro fixed-income market. The other side of the coin of recent outperformance delivered by the credit market is seen in more stretched valuations. However, Negative rates and ECB QE make it more challenging to draw clear-cut conclusions on relative values among core government bonds or, more generally “risk-free assets”, and periphery debt and corporate bonds, as different curve segments may show very different environments and therefore lead to different investment conclusions.

CROSS ASSET (Download)

March 2017

Mars 2017

The Article



European businesses will progressively increase their debt again

The gradual recovery of the European economy is solidifying. Several indicators are showing particularly encouraging signs. Job creations increased in January at their fastest rate in almost a decade. The latest PMI figures also give a positive image of the Eurozone economy. Against this backdrop, we are anticipating that European businesses will progressively increase their debt again. European businesses have less debt overall than their American

counterparts. This difference can be attributed to the low growth in their profits since the crisis, which has driven them to preserve their cash flows. A portion of the debt raised has even served to increase issuers’ cash reserves. Now, we must ask questions about the impacts of the ECB’s Corporate Sector Purchase Programme (CSPP) on European businesses. Through this programme, Investment Grade issuers are enjoying exceptional
financing conditions. As such, there is a strong incentive to use debt to finance share buybacks or increase dividends.

Our assumption is becoming increasingly well founded:

  • Euro primary market activity picked up after the CSPP announcement. The additional issue volume is primarily due to issuers that are eligible for the ECB programme, i.e. non-financial, Investment Grade businesses that are domiciled in the Eurozone.
  • Bank lending continues to increase. According to the most recent figures published by the ECB, outstanding loans to non-financial companies (adjusted for securitisation) increased 2.3% year on year in January. The largest increases were observed in Germany (+3.6%) and France (+4.8%), while the growth trend turned positive again in Italy and Spain.

Another interesting factor that corroborates our scenario is the increase in European M&A activity since the beginning of the year, to a level close to the one observed in 2006.

We do not anticipate a widespread deterioration of European companies’ fundamentals. Only well-rated companies with strong cash flow visibility should increase their debt leverage.

AINOUZ Valentine , Deputy Head of Developed Market Strategy Research
BERTONCINI Sergio , Head of Rates and FX Research
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EUR corporate bonds: a cross-check on valuations
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