Holders of European bank debt don’t need worry about solvency risks, and they can thank European Central Bank President Mario Draghi for that, according to John Bellows of Western Asset Management Co.
"The ECB has made it very clear that they’re not going to allow a funding crisis with European banks," Bellows, portfolio manager for Western Asset, which manages $460 billion in assets as of June 30, said Wednesday on Bloomberg TV. "From the bondholder’s perspective, I do think there’s a real case to be made that solvency is less of an issue."
The ECB started buying corporate bonds in June as part of an expanded stimulus plan it announced in March. That has helped stabilize the region’s economy even as European financial-sector bonds have had a volatile few months amid a series of negative events, including the U.K. vote to leave the European Union and growing concern over non-performing loan levels in Italy. Even in the face of calls for deeper political reform for the sector, all but one of 51 lenders received passing grades in last week’s ECB stress tests.
"We prefer the higher-quality banks, like," Intesa Sanpaolo SpA, Bellows said, referring to Italy’s second-largest bank, which was ranked among the strongest of big European lenders in the stress tests.
In the U.S., Bellows sees "a little bit of optimism" for a long-awaited pickup in inflation toward the Federal Reserve’s 2 percent target, but said lower inflation remains a risk. He added that the corporate-bond market has two things going for it in this environment.
"The first is about fundamentals, which we think are good," he said. "And the second is that yields are still attractive relative to Treasuries."