Asia Bond Buyers Are Turning to Europe Thanks to Cheaper Hedging Costs: M&GBy and
Names not eligible for ECB QE offer good buying opportunities
French credit shows investors aren’t so worried about election
Asian institutional investors are diversifying away from dollar-denominated U.S. debt and looking to Europe, encouraged by relatively lower hedging costs for the euro, according to David Fancourt, a senior fund manager at M&G Investments.
The increasing appetite for euro-denominated bonds is particularly evident among Japanese investors, London-based Fancourt said in a recent interview in Hong Kong.
“Japanese investors are looking at the 12-month forwards to calculate hedged returns into the yen and concluding it is cheaper to hedge euro investments now,” he said. “As a result the yield, once hedged into the yen, is more attractive for European bonds than U.S. bonds.”
Fancourt said he prefers bonds that aren’t eligible for the European Central Bank’s bond-buying program, such as senior bank notes whose “spread differential has widened” over non-financials since the quantitative easing plan. He also said there is value in corporate hybrids, as they have underperformed regular bonds.
When it comes to French corporate bonds, he’s cautious. They’ve been less affected by the selloff that has cheapened more-liquid government peers as the election approaches. Fancourt sees the political risk premium on government debt as ‘overblown’ and reversible. When that happens, sovereign yields will fall, increasing the gap to corporate debt -- and making company bonds more attractive.
The reward bond buyers get for picking the debt of French companies over German ones is half what they can expect in the government bond market. French corporate bonds trade with spreads to sovereign notes of 127 basis points, compared with 97 basis points for German peers, according to a Bank of America Merrill Lynch index.
Orange SA’s 2025 notes, for example, were trading wide to German bunds but not to French government’s debt, Fancourt said. Other bonds, such as Engie SA’s 2026 notes and Valeo SA’s 2025 trade, show similar trends, he said.
When “spreads move by more than the risk we perceive, that’s an opportunity,” he said. “Despite all the talk about politics, from where we’re standing, we don’t see an opportunity.”
— With assistance by Garfield Clinton Reynolds