Credit investors go all in rather than fight central banks

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According to a Bank of America survey, European credit investors have gone all-in, believing the extraordinary central bank market support measures are too powerful to resist.

The investment bank, which surveyed 51 fund managers across the UK and mainland Europe, found that historically low interest rates and extensive asset purchase programs put in place to limit the economic damage of the Covid-19 pandemic has encouraged many to stock up. corporate bonds. The net percentage of investors who are overweight top-rated bonds – a measure of the number of positive long-term bets minus those making negative bets – reached 62%, the highest on record.

Barnaby Martin, head of European credit strategy at Bank of America, said demand for corporate bonds is exceptionally high due to the “liquidity support central banks have put in place.” “[Investors] I think central banks have their backs, central banks will be accommodative and continue to do what they are doing for a very long time,” he added.

At the height of the Covid-induced market panic earlier this year, central banks led by the Federal Reserve and European Central Bank announced sovereign and corporate bond purchase programs that supported credit markets. Nearly 60% of respondents to the BofA survey expect the ECB to continue its support for many years.

Last month, Fed Chairman Jay Powell said, “We’re in this until we get through well,” signaling the central bank’s decision. will expand its monetary support measures, which include the purchase of exchange-traded funds that invest in corporate bonds as well as buy debt directly companies.

In a low or negative interest rate environment, investors have record sums pumped in corporate debt markets looking for income. According to an ICE BofA index, the purchase sent yields on European investment grade corporate debt down to 0.56% from 1.81% in early April.

“We certainly feel more constructive on the asset class when the Fed and other central banks have their arms around them. [us]”, said Colin Reedie, co-head of global fixed income at Legal and General Investment Management. “It’s a safety net.”

Mr Reedie added that the level of monetary support raises questions about how free markets really are “when you have that level of interference”. Low interest rates and government support measures have allowed “zombie businesses” to continue, he said, referring to struggling companies kept alive by historically low borrowing costs.

Nearly half of investors surveyed by BofA said defaults among European companies are suppressed by support measures. Investors seem confident, Mr Martin said, that central banks “are not tiptoeing out yet.”

But the real pain, he added, will likely be felt when companies are weaned off certain support measures, such as the UK Job Retention SchemeLater this year.

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