Euro-area countries were struggling to achieve growth and inflation even before the coronavirus pandemic. Now global lockdowns and trade disputes have compounded their problems. Still, we believe euro fixed-income markets offer active investors attractive opportunities and worthwhile income.
Several key things are going right, in our view, with fundamental, technical and valuation factors all aligning to support euro bond investors.
Fundamentals Are Improving Following the Crisis
Euro-area governments have been resolute in addressing the spread of the coronavirus and—relative to other leading developed-market economies—have been quite successful. The virus is better understood, with eurozone countries having more tools to control future outbreaks and pave the way for a stronger recovery. Also, although the virus has hurt economies, it has strengthened political collaboration and burden-sharing in the eurozone.
The European Union (EU) recovery plan signals a new phase in eurozone integration, suggesting lower political risk. By comparison, political frictions are increasing in many other parts of the world—notably in the US, which is in a more volatile political phase with elections looming. Of course, we recognize that European integration remains a bumpy journey and that fiscal union is still a project for the future. But we believe the eurozone is emerging from the crisis in relatively good shape.
Policy Moves Make Technicals Extremely Supportive
The European Central Bank (ECB) remains committed to keeping rates low for the foreseeable future and to continuing the extremely supportive policies started by its former president, Mario Draghi, in 2012. That means maintaining and extending the ECB’s huge asset purchase programs, and so continuing to be a buyer of last resort for both euro-area government bonds and investment-grade corporates. The programs will also have an indirect positive effect on euro-area high-yield (HY) bonds by continuing to push investors further out on the risk spectrum, fueling demand for HY.
Consequently we expect that strong support from the ECB will continue to allow euro-area corporate borrowers to issue new bonds at very low rates and to refinance their debts. By comparison, the US Federal Reserve (Fed) purchase program is newer and will cover a much smaller proportion of US supply. That’s why we expect volatility will be lower in the eurozone relative to other parts of the world, particularly the US.
To put the size of the ECB programs in context (Display), during 2020 we expect the ECB to buy somewhere between €800 billion and €1,000 billion of fixed-income assets—possibly more. That’s a multiple of the expected net supply over the same period, creating a huge tailwind for euro fixed-income markets and a safety net for euro-area corporates struggling with the impact of the virus.