On Thursday we documented [12] why the ECB will soon be forced to buy corporate bonds. Paraphrasing Soc Gen, we noted that as yields on risk-free assets plunge further into negative territory (and don’t look now but the 10-year bund is 5 bps from zero), the wider spreads to corporate must go because investors simply don’t want to lend money to companies at negative rates. Here’s what we said:
The concept is pretty simple: no one wants to loan money to a company at a negative interest rate (although they’ll do it for a recently insolvent sovereign) and so the further into negative territory you push the risk-free rate, the wider the spread to corporate credit. This, SocGen says, may force the ECB to purchase corporate bonds which will have the happy consequence of checking two Keynesian insanity boxes at once. Further imperil the central bank balance sheet? Check. Strip whatever’s left of the market’s ability to signal anything about credit risk by sending yields below zero for assets which are by their very definition not risk free and thus contribute to the growing number of NIRP-inspired aberrations? Check.
So when the ECB is finally forced, by distortions of its own making, to dive into the corporate bond market, and when, after that, Mario Draghi goes full-Kuroda and throws the ECB’s balance sheet behind European equities, the central bank may want to check in the following places for relative value because according to Bloomberg, these are the countries where the “bargains” are to be found in equities and fixed income:
Via Bloomberg:
Equity markets appear least overvalued in Austria, Finland and the Netherlands, as the chart shows. Both their cyclically adjusted price-to-earnings ratios and their "Fed model" ratios are below the averages for the 13 euro-area countries for which data is available…
[13]
[14]
In terms of corporate bond markets, Finland, Ireland, Luxembourg and Portugal appear the most attractive. The risk premiums — the difference between the 10-year composite yield on corporate bonds with ratings from A to B and the 10-year euro swap rate — are the highest on bonds from those countries.
[15]
