European Funds' Bond-Buying `Tsunami' Is Set to Fade on ECB

(Bloomberg) -- European investors have been plowing so much capital abroad they’ve taken up about half the boom in U.S. corporate debt in recent years, but now that liquidity tap is poised to be shut off, according to Oxford Economics.

"The global debt issuance boom is likely to lose steam, given the extent to which it has relied on the support of European investors," Guillermo Tolosa, an economic adviser to Oxford Economics in London who has worked at the International Monetary Fund, wrote in a research note released Friday. "Issuers better seize the opportunities while they last."

European Central Bank asset purchases took up so great a supply of bonds that it pushed euro area investors into markets abroad, to the tune of 400 billion euros ($473 billion) a year over the past three years, Oxford Economics estimates. With the ECB poised to halve its monthly buying pace to 30 billion euros starting in January, next year might see just 200 billion euros in European investor outflows, the research group calculates.

"This is a large enough fall to risk causing disruption in some markets, including emerging markets, which have come to rely heavily on European flows recently," Tolosa wrote. "A global tsunami of euros" benefited borrowers during the past three years, and accounted for a "staggering" 50 percent of net U.S. corporate-debt issuance, he wrote.

The end of the ECB’s purchases will lead to a further cutback in European outflows, Tolosa predicts.

European funds have slashed the domestic share of their fixed-income securities holdings by more than 7 percentage points, to less than 70 percent, since the ECB’s program began. As flows head back into the domestic markets, that could temper the impact of the ECB’s policy normalization on the region’s securities. Upward pressure on European debt valuations may last "for a protracted period," Tolosa wrote.

©2017 Bloomberg L.P.

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