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European investment grade (IG) credit has made a convincing recovery after its September wobble. A rebound in equities, despite uncertainty over the resurgence of the pandemic, has encouraged market participants to re-enter risk positions. A step up in corporate bond purchases by the ECB, while primary issuance has started to fade into the end of the year, has also helped the dynamic. Indeed, the option-adjusted spread on the Bloomberg Barclays Euro Aggregate: Corporates Index has tightened to around 110bp, its tightest since 27 February 2020.
Further spread narrowing remains possible but is likely to be slower. The decline in the Bund yield, deep into negative territory, has created a strong downdraft for spread assets, dragging their yields lower. As Figure 1 illustrates, IG corporate yields may have fallen, but other risk assets, in this case 5Y Italian BTP yields, have declined even faster. Over the past 10 years it has been unusual for the 5Y BTP to trade with a yield below that of Euro IG credit. The only sustained period was in 2015-16 while the ECB bought government debt but not corporate bonds – CSPP (Corporate Sector Purchase Programme) purchases of credit started in June 2016.
There may also be specific reasons for the strong performance of peripheral bonds in 2020 with the EU’s Recovery and Resilience Facility, its centrally funded plan to recover from the pandemic, seen compressing intra-Euro spread risk. However, the bigger picture is that, as yields head down into negative territory, assets offering yield pick-up are going to be an increasingly important source of returns.
Figure 1: All risk asset yields have been dragged lower by negative rate policy
There are clearly some risk events during the remainder of 2020, not least the US election. This may cause some investors to pare back exposure to risk but the better rating of IG paper and, with the ECB buying backstop still in play, the potential for a meaningful sell-off looks limited. The September episode of risk aversion as COVID-19 infections started to rise saw option-adjusted spreads on the Bloomberg Barclays Euro Aggregate: Corporates Index widen 7bp, a move that took just 12 working days to reverse.
Aside from risks around the election itself, the longer-term concern is that a new US administration could introduce fresh legislation that would not be seen as positive for stocks. With much of this legislation likely to be environmental, one way to reduce the impact is through a focus on ESG investments.
There are also risks closer to home. ECB President Christine Lagarde has recently highlighted that the ECB’s strategy review will look at whether it should continue to buy corporate bonds on a ‘market neutral’ basis or whether the purchases should take other considerations into account. This mainly refers to environmental factors after environmental groups have criticised the ECB for offering cheap funding to big polluters such as oil companies and airlines.
The Bloomberg SASB Euro Corporate ESG Ex-Controversies Index excludes issuers from the parent index that are involved in or that derive significant revenue from operations related to extreme event controversies, controversial weapons, UN global compact violations, thermal coal extractions, tobacco or civilian firearms.
From the remaining issuers in the parent index, those without an ESG score available are removed. The index is then optimised by selecting securities and their corresponding weights to maximise the ESG score while maintaining similar risk-return characteristics of the parent index. The optimisation process allows this ESG strategy to be used as either a complement or instead of a core allocation to Euro Corporate for benchmark-aware and ESG-focused investors.
For investors seeking to exclude certain practices, industries or product lines, we now offer the SPDR Bloomberg SASB® Euro Corporate ESG UCITS ETF. The ETF follows an embedded ESG approach that builds on SASB’s materiality map to maximise the ESG score via a best-in-class/positive screening methodology. To learn more about this ETF, please visit its fund page.
Sources: Bloomberg Finance L.P., for the period 8-15 October 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
Marketing Communication. For Professional Client Use Only.
For regulated qualified investors according to Art. 10 (3) lit. a and b of the Swiss Capital Investment Schemes Act only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440.
Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
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Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semiannual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.
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Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions.
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Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
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2015149.146.1.EMEA.INST
Exp. Date: 31/10/2021