EUR Bond Market Is Distorted

by | Feb 24, 2015

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Markus Allenspach of Julius Baer

Markus Allenspach, Head Fixed Income Research at Julius Baer believes that the European Central Bank regards EUR corporate bonds as expensive. He said:

“Our strategy to avoid the EUR bond market as much as possible – and invest in European real estate investment trusts and USD high-grade bonds instead – has received support from the European Central Bank (ECB). In the first ever minutes of their policy meeting published yesterday, the members of the ECB Council focused on purchases of government bonds although they seemingly agreed that buying corporate bonds would deliver a more direct stimulus to the economy. The noted: “However, it was widely judged that, given the current level of corporate bond yields and the size of the corporate bond market, the credit easing potential of corporate bond purchases appeared rather small”. In other words, EUR corporate bonds are too expensive.

“We share the view that the EUR bond market is distorted and investors will find more attractive risk/return profiles elsewhere.”

On European government bonds, he said:

“The fear of Greece exiting the eurozone is declining with every meeting, which is supportive of the euro and European financial markets in the shorter term.”

“‘After the meeting is before the meeting’ remains the theme in the euro area. Greece and the rest of the eurozone members time and again walk out of the ‘last’ negotiations only to meet again some days later. We maintain our baseline scenario that a compromise can be found in the last minute, which could be 28 February 2015, when the current support programme ends, or some time in March or April, when Greece is expected to run out of money. The latter point in time is hard to calculate. Last year, Greece generated a primary budget surplus, but in January government revenues had declined about 25% below their level of January 2014, as taxpayers seemingly slowed their payments in anticipation of a more relaxed tax collection attitude of the new government or tax cuts. With this decline in tax collection in mind, we can understand why the rest of the Eurogroup insists on strict control from the troika (European Commission, European Central Bank and International Monetary Fund) of the Greek fiscal policy implementation.”

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