Markus Allenspach (Julius Baer) | We maintain our Overweight on EUR low-grade bonds against the backdrop of low money-market rates and remote recession risks. Moreover, we share the view of the market that the odds for a new corporate-sector purchase programme of the European Central Bank are rising, which could additionally lift bond prices.
European Central Bank (ECB) President Draghi delivered a pretty ‘dovish’ message last week. In his speech at the ECB Conference on Central Banking, Draghi pledged to deliver more accommodation if the eurozone economy does not improve. Two weeks before, he still talked about rate cuts just in case the downside risks materialised.
The bond market is anticipating a resumption of the Asset Purchase Programme, also known as quantitative easing. As part of this programme, the ECB had acquired not only EUR2.2 trillion of public sector debt, but also EUR178 billion of EUR-denominated investment-grade bonds of non-financial issuers.
Given that a large part of the yield curve of German, French and even Spanish government bonds is in negative territory, the bond market expects a higher share of corporate-sector purchases this time. Accordingly, we see the spreads of eligible bonds tightening as the market readies for ECB announcements.