For almost two years euro area Investment Grade (IG) corporate bond spreads have been tightening, triggering a
strong absolute total return (2016: 4.8% and 2017 ytd: 1.8%) and outperforming most other government bond markets. Meanwhile, supported by decreasing underlying yields, the corporate yield level is close to a historical low.
EA Corporate Bonds: Tougher times ahead
Authors: Luca Colussa, Florian Späte
- For almost two years euro area Investment Grade (IG) corporate bond spreads have been tightening, triggering a strong absolute total return (2016: 4.8% and 2017 ytd: 1.8%) and outperforming most other government bond markets. Meanwhile, supported by decreasing underlying yields, the corporate yield level is close to a historical low.
- At current spread levels, the scope for a further tightening appears limited. This applies all the more as adjusting for the lower rating composition corporate spreads are closer to their historical tights than headline figures suggest.
- Taking into account the ambitious valuation, the forthcoming scaling back of ECB purchases in combination with an ongoing large supply of new corporate bonds is expected to induce higher spreads in 2018.
- Hence, coupled with higher government bond yields, IG corporates will struggle to render positive total returns. Given the low compensation for taking risks, low-rated and long-dated corporates do not appear appealing any longer.
Read the full publication below.
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