Europe Credit Pessimism Grows Even Before ECB Halts Bond Buying

By Anthony B. Sanders

[biiwii comment: the startling pic at the end is of a hungry vulture]

All eyes are on European markets, once again.

(Bloomberg) — European credit may be nearing a tipping point as investors take notice of worsening risk indicators just as the region’s biggest bond buyer prepares to exit the market.

Volatility has swept back into the market as the European Central Bank readies to end a program that’s bought $190 billion of corporate bonds in little more than two years. Spreads have widened to levels not seen for more than a year and the supply of new corporate debt has been patchy. Political and economic risks have also triggered sell-offs as investors grow sensitive to the future health of the economy.

“Most people’s general view on credit has shifted from bullish to bearish,” said Juan Valencia, a credit strategist at Societe Generale SA. “The big issue for European credit investors is risk-reward — there is too little upside and lots of downside.”

Pessimistic investors can point to economic warning signs, such as the biggest drop in German exports since 2012 and declines for the euro area manufacturing purchasing managers’ index. The ECB will also cease stimulus measures at the end of this year, and potentially think about raising rates late in 2019, stoking concerns about how much longer the euro zone’s five-year-long economic growth stretch can run.

“We are in a late phase of the cycle,” said Gilles Pradere, a portfolio manager at Geneva-based RAM Active Investments, which oversees about $5 billion. He’s favoring bonds that can withstand a downturn and trading credit-default swap indexes to maintain liquidity.

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Investor pessimism has helped drive spreads on investment-grade euro bonds up about 30 basis points this year to 116 basis points, according to Bloomberg Barclays index data.

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If we compare European and UK banks and US banks, we see that Deutsche Bank’s CDS has actually relaxed over the last month. Bank of American and Wells Fargo (as well UK’s Barclays Bank) are in the safe zone.

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European sovereign CDS remain high for Greece, Italy and Russia (all over 100).

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But the mac daddy of CDS spreads is not in Europe, but South America! (Venezuela is at 10,550.80!). South and Central America have 9 countries with 5Y CDS in excess of 100.

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Allegedly, the ECB is supposed to be raising rates and halting their bond buying. We shall see.

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Gary

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