ECB buys corporate bonds

As Draghi flashes his corporate credit card, which funds have also been buying European corporate bonds?

Instead of following Japan into tiered negative interest rates, Mario Draghi, president of the European Central Bank decided in March to extend his asset purchase programme (a form of quantitative easing) and buy investment grade euro-denominated bonds, as well as government bonds. Yesterday, 8th June, marked the start of his circa €80bn* monthly shopping spree.

Commenting on the move, Darius McDermott, managing director of Chelsea, said: “By adding corporate bonds to its list of government, agency and covered bonds, as well as asset-backed securities, the European Central Bank is now firmly in the realm of credit easing. Draghi is effectively extending the bond buying cycle but this doesn't mean the inevitable reversal (when interest rates are eventually raised) is no longer a concern and it reinforces the need for careful credit analysis by bond fund managers in the meantime.

“In the intervening period since the announcement, bond funds with decent exposure to Europe should have benefited, as the move is supportive and will have been priced in in advance of the actual purchases. While government bond yields in all developed markets are so low (negative in places), corporate bonds remain attractive in comparison. At the moment, you are being paid a fair amount for the extra risk you are taking.

“The European economy is arguably stronger today than it was a couple of months ago and, if company management confidence increases, as is the hope, they should increase spending and so begins a more virtuous and self-sustaining cycle.”

Fund picks

“Funds I like, which have taken advantage of the new support from the European Central Bank and which may continue to gain from the trade, include TwentyFour Dynamic Bond and Invesco Perpetual Monthly Income Plus, both of which are on the Chelsea Core Selection.

“The former currently has its highest ever weighting in euro-denominated holdings (around 48%), having moved to become equally spread across euro and sterling bonds in the past few months. They have actively been targeting as much euro-denominated issues as possible due to the tailwinds provided by Draghi's actions.

“The Invesco fund has also increased its holdings. While the fund remains defensively positioned, the managers have been selectively adding exposure when they think that the balance of risk and reward has become attractive. While Draghi is targeting non-bank corporate bonds, these managers have been adding to their financial holdings, particularly the subordinated debt of high quality European banks. They also see some opportunities in junior debt across other sectors including telecoms, utilities and insurance.”