Bond Investors Should Be Cautious of ECB Purchase

As the European Central Bank begins its corporate bond buying programme, Morningstar's Mark Preskett urges investors to look for value

Mark Preskett 3 June, 2016 | 8:59AM
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Mark Preskett: The European Central Bank’s meeting this morning produced little in the way of surprises for investors. The ECB governing council left its refinancing rate at zero, and the deposit rate for bank reserves at negative 0.4%.

There were also small upgrades to growth and inflation forecasts in Europe.

Today’s meeting is perhaps most noteworthy for marking the start of the ECB’s high-grade corporate bond buying programme. This begins in a week, on June 8th, and the scheme has already been a dominant factor in the European investment grade market for almost three months now.

European corporate credit spreads, which measure the difference in yield between corporate and government debt of similar maturity, have narrowed from around 135 basis points at the time of the announcement in March to around 110 basis points today.

And with the formal start of the bond buying programme, many investors are bullish on the asset class.

Our own view is one of caution, given the low level of yields across the fixed income markets. From a relative standpoint, we are seeing better value in emerging market and high yield debt compared to the investment grade space, where spreads look around fair value.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Mark Preskett  is a Senior Investment Consultant & Portfolio Manager for Morningstar UK