In case you were looking for more evidence to suggest the coordinated dovish pivot from central banks in 2019 has been exceptionally effective at reinvigorating the hunt for yield, look no further than European credit.
For the better part of three months, BofA’s Barnaby Martin and Ioannis Angelakis have been keen on emphasizing that conditions are once again favorable for the asset class and as the duo writes in a note dated Thursday, “European credit feels like the gift that keeps on giving at present.”
In fact, high-grade spreads across the pond tightened 15bp in April, the best month of the year and the most dramatic tightening since July of 2016. IG and HY have both rallied every month in 2019.
As ever, the proximate cause is central bank dovishness predicated on subdued inflation and a marked deceleration in global growth. The prospect that “lower for longer” actually means “lower forever” and the threat (however far-fetched you might think it is) that rates will eventually be pushed into deeply negative territory, have further incentivized investors to clamor for yield.
“Turbo charging spreads of late has been another big dose of the familiar: central bank dovishness”, Martin writes, adding that “inflation dynamics have turned more challenging this year for both advanced and emerging economies across the globe [and] this has forced central banks to question the ‘lower bound’ for interest rates.”
(BofAML)
In Europe, this has manifested itself in what Martin calls an “eye-watering” (that’s one of his favorite descriptors) grab for yield. For instance, BofA marvels that “average new issue oversubscription for Euro-denominated IG deals reached almost 5x, a record high”.
(BofAML)
Notably, Martin observes that is “higher than at any time during CSPP, when the ECB was buying in primary”.
In other words, the dovish lean from policymakers since January has now created a situation where market participants are even more thirsty for yield than they were when the ECB was actively distorting the supply/demand dynamic in the credit market.
“Whatever it takes”, I suppose.
Never thought I’d see FIs bought more than with the ECB combined. Unreal