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Europe’s Credit Investors Take Few Risks Ahead of ECB Meeting

Europe’s Credit Investors Take Few Risks Ahead of ECB Meeting

(Bloomberg) --

Europe’s credit investors are worried that Mario Draghi will let them down.

Portfolio managers have been selling corporate bonds and government debt futures as hopes for additional stimulus measures at Thursday’s European Central Bank meeting start to fade. Euro investment-grade bonds are down -0.8% in September, their worst month in almost three years.

“We’ve taken profits on the credit risk that we held to protect the gains we’ve made this year,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privee, which oversees about $135 billion in assets. “The potential for spreads to widen seems a larger risk than a sharp tightening given how much spreads have rallied.”

Kazmi sold out of long positions in U.S. and German five-year futures, and tactically went short 10-year bund futures.

Lack of action by the ECB could hammer euro high-grade corporate debt, particularly as Draghi hints about potential stimulus helped fuel a credit rally for much of the year. High-grade euro corporate notes posted total returns of 7.6% in the first eight months of the year, while yields touched a record-low of 0.23% less than two weeks ago, according to a Bloomberg Barclays index.

Europe’s Credit Investors Take Few Risks Ahead of ECB Meeting

Yields have subsequently jumped 14 basis points with policy makers including Bank of France Governor Francois Villeroy de Galhau and his Dutch counterpart pushing back against QE assumptions. Government notes have responded accordingly, with German 10-year yields moving to -0.54% from record lows of -0.72% in August.

“Despite the recent Eurozone bond selloff, we still believe the market is pricing in too great a possibility of QE, and we enter the ECB meeting bearish on euro rates,” said Mike Riddell, head of UK fixed income at Allianz Global Investors.

The ECB bought almost 180 billion euros ($198.5 billion) of corporate notes between June 2016 and the end of 2018. It has only reinvested matured bond holdings this year.

To contact the reporters on this story: Tasos Vossos in London at tvossos@bloomberg.net;Priscila Azevedo Rocha in London at pazevedoroch@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

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