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Market Vectors’ fixed income portfolio manager
Fran Rodilosso today commented on Thursday’s announcement by the European Central Bank (ECB) that it would embark on an unlimited bond buying plan, a move that has so far been met positively by most corners of the global markets.
“The ECB announcement has already encouraged further buying of risk assets and high-yield bond markets were a significant beneficiary in Europe, the U.S. and emerging markets,” said Rodilosso. “Yesterday, we saw some of the highest yielding bonds performing the best. Credit spreads on financials in Europe obviously tightened significantly, but they also tightened on Chinese property companies, U.S. industrials and just about everywhere else yesterday.”
“The key elements of the plan were well telegraphed ahead of yesterday’s announcement, and I view the market’s reaction as a sign that investors are positioned conservatively,” continued Rodilosso. “Investors are still long cash and dealers are low on inventory. Also, not surprisingly, the plan leaves room for ways out. For example, a country must formally request help, and help is conditional on countries meeting agreed upon targets. But the key market perception is that the ECB is showing more commitment to drastic measures to fix the problem. By no means does it mean the ECB will succeed, or even follow through as planned. However, there is an air of credibility that the ECB has tools at its disposal and that it is willing to use them.”
“So, for credit markets, my view is that the news is good for now, and for high-yield credit even better,” he added. “A European ‘muddle through’ scenario keeps hopes alive for low to moderate global growth combined with a sustained period of low interest rates. Given generally healthy credit fundamentals among corporate borrowers and the fact that there are few income generating alternatives, developments that remove an element of disaster risk are likely to attract more investors to the high yield market.”