Credit Bulls Back in Force as ECB Taper Fades Into the Distance

(Bloomberg) -- Credit investors see less to fear from tapering by the European Central Bank, when it does eventually happen, and they’re buying again.

Rising bets that policy makers at the ECB will leave elevated bond purchases in place at their meeting next Thursday and overlook a spike in inflation have put credit bulls back in charge. Yields on investment-grade credit have steadily declined since spiking last month and are the lowest in three weeks, while those on the riskiest type of bank debt just hit a record low.

“While it is understandable that markets were edgy at the prospects of a forthcoming review of PEPP buying, expectations of tapering in June were overblown,” said Silvia Dall’Angelo, senior economist at Federated Hermes, referring to the ECB’s pandemic emergency purchase program.

With tapering looking more distant, and possibly less scary, strategists at Mizuho International and BNP Paribas are advising clients to keep buying corporate debt.

“There should be room for risk assets, especially euros, to continue to perform strongly,” Mizuho strategists including Peter Chatwell wrote in a note to clients Thursday. “With market liquidity returning, now looks a very attractive time to get long euro spread products.”

Corporate bonds are set for a long-lasting period of low but positive returns that can accumulate to large gains as central bank tapering gets pushed off, according to BNP Paribas strategists. They predicted that policy tightening, when it does happen, will be a “taper snoozer” rather than the tantrum of years past.

Buying credit at inflated values “may feel like you’re picking up pennies ahead of a steamroller, but that steamroller is likely far away leaving plenty of pennies to pick up,” according to Viktor Hjort and Dominique Toublan in a note Tuesday.

Europe

There was just one issuer in the European primary market on Thursday as the Corpus Christi holiday in some parts of the continent dampens prospects of new bond sales.

Asia

High-grade borrowers dominated new dollar offerings in the Asian primary market on Thursday, with only one high-yield name out of five new deals.

• Sichuan Languang’s local bonds slumped further Thursday, poised for record lows amid ongoing debt worries about the Chinese developer
• Dan Ivascyn, CIO of Pacific Investment Management Co. said Pimco is favoring those parts of the high-yield market most likely to benefit from an economic reopening, including airlines, hospitality and gaming sectors, and commercial real estate.

U.S.

Saudi Aramco is preparing to return to global capital markets with a bond sale that would help fund a $75 billion dividend commitment after it raised $8 billion in dollar-denominated debt for similar purposes in November. Aramco is considering a sale of both dollar and local-currency sukuk.

• Ethical bond bankers have a busy summer of deal-making ahead, as more borrowers enter the burgeoning sustainable debt market for the first time. Meanwhile, global sales of sustainability-linked loans have soared to $163 billion in the year to date, already surpassing 2020’s full-year volume and setting an annual record in just five months
• Johnson & Johnson will make a $2.5 billion payment related to various talc cases, which includes total accrued interest, in June 2021, according to an 8K filed on Tuesday

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