US credit: Feeling the effect of European QE
By Benjamin Streed, CFA, Fixed Income, Raymond James
July 25, 2016
In my last note I detailed how the US Treasury market holds an enviable position in today’s global marketplace, a respectable yield paired with a large/liquid marketplace. Taking this idea one step further, how are spread products like US corporate debt looking compared to other areas of the world? As we’ve long suspected, ongoing monetary stimulus in the form of quantitative easing (QE) in both Europe and Japan, in which central banks are directly purchasing bonds in the marketplace, have pushed many yields well into negative territory. With an estimated ~$13 trillion in high quality, sovereign debt now yielding less than zero there is a clear message being sent to the markets: seek safe yield wherever you can. The European Central Bank (ECB) increased its commitment to monetary stimulus in March, with ECB president Mario Draghi stating he would do “whatever it takes” to stoke growth and inflation. As you’d expect, yield spreads across the globe immediately fell as the chase for yield was once again in full force. The chart below details two Bloomberg Composite indices, domestic (white) and European (red) with spreads on top and index yields in the lower pane. With nominal European corporate yields now sitting at only 51 basis points (bp), the US average of 282bp, a pickup of ~230bp for a similar credit rating and maturity, looks incredibly attractive in a world where investment opportunities are less likely to be weighed in isolation, and instead are more likely to be considered on a global scale.
Although the spreads above are only ~60bp different, those readers that caught my piece two weeks ago will recall that US Treasuries out yield European sovereign debt by a considerable margin, thereby making any US debt product that much more attractive. As a result of this global shift and renewed focus on yield, investment grade (IG) corporate credit in the US is once again performing well, with BBB-rated issuers outperforming higher quality (less spread) A and AA-rated debt. More information on yields, spreads and returns on various domestic credit indices can be found in our Weekly Index Monitor. Year-to-date, the Citi IG Index is up 8.92%, not bad for an approximate 10-year average maturity, an effective duration of ~7 and an A- credit rating. The table below details each sub-index, broken down by credit rating and industry for those looking to focus on finance, industrial and utility issuers. For several years our strategy team has highlighted the potential benefits of owning BBB-rated issuers and the outperformance potential of those issuers with higher than average spread. As expected, the global hunt for yield is having an effect on domestic credit, and for those seeking some mixture of safety, liquidity and yield, the US still appears to be the only game in town. Is it any wonder why investors overseas are looking beyond US Treasuries and finding value in nearly every corner of our markets?
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