What Draghi’s Bond Buying in Europe Means for U.S. Debt MarketsSridhar Natarajan
The European Central Bank’s resolve to funnel more than a trillion dollars into the region’s capital markets may be a boon for borrowers across the Atlantic.
ECB President Mario Draghi unveiled a bond-purchase program to ward off signs of deflation threatening to engulf the euro area similar to the exercise undertaken by the Federal Reserve six years ago. The infusion aimed at boosting asset prices may prompt investors to shift money into U.S. corporate bonds, which offer the most yield relative to company debt in Europe in a decade.
“Yield differential in U.S. and Europe is significant now and this ECB move will further help European corporates rally,” Scott Service, a Boston-based money manager who helps oversee $39 billion in Loomis Sayles & Co.’s global bond strategies, said in a telephone interview. “This could cause some global investors to favor the U.S. market over Europe.”
Investment grade and high-yield debentures in Europe have outperformed all company debt in the U.S. in each of the last three years as the ECB encouraged risk taking with various measures to boost growth. Meanwhile, the Fed is contemplating measures to reverse accommodative monetary policies, as the U.S. expansion outpaces Europe.
The average yield on U.S. investment-grade bonds exceeds European high-grade debentures by 1.9 percentage points, Bank of America Merrill Lynch index data show. That’s close to December’s 2.1 percentage-point gap, which was the most in a decade.
The extra interest investors get to hold U.S. junk bonds compared to euro-denominated high yield notes is hovering near an all-time high of 2.9 percentage points, index data show.
“In our global high-yield portfolios, we have reduced exposure to Europe and moved to the U.S. for exactly that reason,” Ivan Rudolph-Shabinsky, a New York-based money manager at Alliance Bernstein Holding LP, which oversees about $30 billion in high-yield assets, said in a telephone interview. “I wouldn’t be surprised if more people say ‘I get better value in the U.S.’”
Growth in the U.S. is expected to climb to 3.2 percent this year according to forecasts compiled by Bloomberg. That compares with expectations of a 1.1 percent expansion in Europe.
About a third of respondents forecast deflation in the Euro area this year, according to the most recent survey.
“You have had this big influx of foreign money into U.S. Treasuries recently,” Service said. “I don’t see why that wouldn’t happen in corporates as well.”