European Credit Is as Relaxed as a Spanish Beach Holiday

(Bloomberg Gadfly) -- The selloff has started in corporate bonds, with massive outflows in high yield and global funds. So it's more than a little perplexing that euro-denominated credit spreads are still pretty much at their tightest ever. 

The region's investors are still caught in a yield famine, a direct function of having a central bank that is intent on keeping its deposit rate at minus 40 basis points for the foreseeable future and is mopping up any free float in both corporate and government bonds. As a consequence any spread-widening is gratefully received and lapped up with even stronger demand from investors. 

Then there is the Terminator -- the European Central Bank's Corporate Sector Purchasing Program. It has snapped up an average of 1.5 billion euros ($1.9 billion) of company debt every week since it started in the summer of 2016, the one constant in the region's fixed-income markets despite tapering of ECB government bond purchases. It is certainly keeping corporate funding costs at a record low. In fact, 18 percent of its holdings have negative yields, some 193 bonds in total. 

Whether it is God's work to enable global luxury goods group LVMH to fund at effectively zero percent is debatable -- but there is no doubt the ECB's accumulation of 140 billion euros of corporate credit has spread the good news across into financials and high yield bonds as well. There are signs that investors may have finally found their limits, as there has been some correction from returns that got so low as to make a joke out of calling junk-rated securities "high yield."  

Light supply is also smoothing the ructions of the turbulence of last week's stock markets. Corporate issuance in Europe is running at a 15.6 percent slower pace year-to-date compared to the same period in 2017. It has been a quiet month for new issues with some indigestion evident -- 56 percent of new issues this month are trading wider from the launch spread.

With growth powering ahead and the ECB staying firmly away from a tightening cycle, support for company credit doesn't look like it will go way anytime soon. Europe really is in its own world.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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