Markets are pricing in tighter central bank policy but, until there is some clarity on inflation, it will be hard to say rates have peaked. With European growth more vulnerable to high energy prices, we see an opportunity in short-maturity euro investment grade strategies to provide a buffer against rising rates. Investors could also consider an ESG approach to this exposure. ESG screening and index optimisation can enhance performance even during challenging periods, which we saw in Q1 2022.
Safety First in Europe
Inflation is at historically high levels and many central banks appear to be behind the policy curve. Pressure to start normalising interest rates is acute – see our Q2 Bond Compass: Solutions for a New Rate Regime for further discussion of this topic. The European Central Bank (ECB) has yet to start the normalisation process and the markets have in mind that, like the US Federal Reserve (Fed) and Bank of England (BoE), the ECB will raise rates aggressively. The ESTR forwards price 75bp of rate rises by the end of 2022 and 130bp over the coming 12 months.1
While there seems to be an indisputable case for lifting policy rates out of negative territory, it may be more challenging for the ECB to embark on an aggressive policy tightening cycle for several reasons:
Institutionally dovish: Since the 2011 ‘policy error,’ the ECB has erred on the side of caution, maintaining rates in negative territory since 2014. While the Fed and BoE were both engaged in policy tightening in 2017, the ECB kept rates steady even though CPI was at levels consistent with its target while the EU measure of Economic Sentiment hit its highest level since 2000.
End to an era of bond buying: The ECB has continued to buy government bonds since 2015. The latest signals from the ECB are that purchases will cease at the start of July 2022. This is already proving a shock to the system, with yields rising and core-periphery spreads blowing out. The ECB has actually stepped up its Public Sector Purchase Programme bond purchases over the past few weeks in part due to the Pandemic Purchase programme being run down but also to counteract market moves, with the rise in government yields effectively tightening monetary conditions in the euro area.
Growth risks: Inflation may be the ECB’s target but it will be aware that much of the rise in CPI is due to energy prices. These and other global cost-push elements to inflation will not be controlled by managing aggregate demand in the economy. In fact, higher energy prices and reduced availability of some resources will actually hurt demand. Weaker business and consumer surveys suggest there are risks to growth that may give the ECB some cause for concern.
ECB Public Sector Purchase Programme Steps up a Gear
In short, the market now prices in a considerable amount of tightening and there are risks that the ECB does not validate this. A key disincentive to investing in the front end of the curve in the euro area has been the lack of running yield: despite the bond market sell-off, the two-year German government bond still only yields just over 10bp.
One way to enhance the running yield is to focus on investment grade credit. The yield to worst on the Bloomberg EUR Corporate 0-3 Year Index is above 95bp, its highest since mid-2014 if the 2020 Covid related spike is ignored. Spreads to government bonds have blown out to their widest since Q1 2013, again if the 2020 spike is looked through. This is despite the fact that the cessation of ECB purchases will be more damaging for government bonds than corporate bonds, given the relative amounts purchased, and suggests that a meaningful economic slowdown is already priced by markets. Signs of financial stress are limited so far, with the upgrades-to-downgrades ratio for Moody’s dropping to 0.56 in Q1 2022 but then rebounding to 1.67 for Q2 so far. For S&P, the ratio has remained well above 2 for both quarters.
ESG Still in the Ascendancy
For those thinking about returning to investment grade exposures, it may be time to consider ESG. In 2021, 13 out of the 14 UCITS credit ETFs launched had some sort of ESG screening.2 The rise of ESG was challenged early this year by the invasion of Ukraine, which drove outperformance for the typically non-ESG-compliant sectors of energy and defence. However, there are different approaches to ESG.
The State Street Global Advisors approach for fixed income ETFs is to create a series of indices, in conjunction with Bloomberg, that reflect the characteristics of the standard non-ESG benchmarks. This way, these exposures can be used for core holdings while at the same time enhancing the ESG rating of the portfolio. Screening then optimising the index, to both maximise the ESG score and to push the characteristics toward those of the parent index, has also helped performance. The Bloomberg SASB Euro Corporate 0-3 Year ESG Ex Controversies Select Index, the index behind our newly launched short-maturity ESG fund, has outperformed the Bloomberg EUR Corporate 0-3 Year Index by 14bp year to date3 despite the non-ESG-friendly backdrop.
How to access this theme
Investors looking to access the 0-3 year euro corporate ESG theme can do so with SPDR ETFs. To learn more about our new ETF, click on the link below to visit their fund pages.
To learn more about our range of fixed income ESG ETFs, we invite you to read our overview that provides an explanation of SASB methodology and how investors can use these exposures in the current environment.
1 Euro Short-Term Rate forwards. Source Bloomberg Finance L.P. as of 28 April 2022.
2 Source: Morningstar, as of 31 December 2021.
3 Source: Bloomberg Finance L.P., as of 27 April 2022.
Information Classification: General Access.
For professional clients use only. For qualified investors according to Article 10(3) and (3ter) of the Swiss Collective Investment Schemes Act (“CISA”) and its implementing ordinance, at the exclusion of qualified investors with an opting-out pursuant to Art. 5(1) of the Swiss Federal Law on Financial Services ("FinSA") and without any portfolio management or advisory relationship with a financial intermediary pursuant to Article 10(3ter) CISA (“Excluded Qualified Investors”) only.
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ETF's worden verhandeld zoals aandelen, zijn onderhevig aan beleggingsrisico, fluctueren in marktwaarde en kunnen worden verhandeld tegen prijzen boven of onder de netto-inventariswaarde van de ETF’s. Brokercommissies en kosten van de ETF zullen het rendement verminderen. De wijzigingen in wisselkoersen kunnen een nadelig effect hebben op de waarde, prijs of inkomsten van een belegging. Verder is er geen garantie dat een ETF zijn beleggingsdoelstellingen zal behalen.
DE SPDR-ETF'S VAN SSGA ZIJN MOGELIJK NIET BESCHIKBAAR OF GESCHIKT VOOR U. DE UITGEDRUKTE MENINGEN/INFORMATIE OP DEZE SITE VORMEN GEEN BELEGGINGSADVIES, FINANCIEEL, JURIDISCH, REGLEMENTAIR, BOEKHOUDKUNDIG OF BELASTINGADVIES. BIJ TWIJFEL DIENT MEN STEEDS ONAFHANKELIJK ADVIES IN TE WINNEN. DE INFORMATIE NOCH ENIGE OPINIE OP DEZE SITE VORMT EEN VERZOEK OF AANBOD VOOR DE AAN- OF VERKOOP VAN AANDELEN VAN DE FONDSEN OF ENIG ANDER FINANCIEEL INSTRUMENT.Standard & Poor’s®, S&P® en SPDR® zijn gedeponeerde handelsmerken van Standard & Poor's Financial Services LLC (S&P); Dow Jones is een gedeponeerd handelsmerk van Dow Jones Trademark Holdings LLC (Dow Jones); en deze handelsmerken zijn in licentie gegeven voor gebruik door S&P Dow Jones Indices LLC (SPDJI) en in sublicentie voor bepaalde doeleinden door State Street Corporation. De financiële producten van State Street Corporation worden niet gesponsord, bekrachtigd, verkocht of gepromoot door SPDJI, Dow Jones, S&P, hun respectieve filialen en externe licentiegevers, en geen van deze partijen doen enige verklaring over de raadzaamheid om te beleggen in dergelijke producten, noch aanvaarden zij enige aansprakelijkheid in verband hiermee, inclusief voor fouten, weglatingen of onderbrekingen van een index.
SPDR-ETF's mogen enkel worden aangeboden en verkocht in rechtsgebieden waar dat is toegelaten in overeenstemming met de geldende regels.
Informatie met betrekking tot Mexico
Deze informatie is geen marketing of aanbieding van effecten en is niet ook niet zo bedoeld, en mag bijgevolg niet als dusdanig worden opgevat. De fondsen waarnaar in dit document wordt verwezen, zijn niet en zullen niet worden geregistreerd onder de Mexicaanse wet op de effectenmarkten (Ley del Mercado de Valores) en mogen in Mexico niet aan het publiek worden aangeboden of verkocht. De documentatie met bekendmakingen in verband met een van de bovengenoemde fondsen mag niet openbaar worden verspreid in Mexico en aandelen van de fondsen mogen niet worden verhandeld in Mexico.
SSGA SPDR ETFs Europe I Plc en SSGA SPDR ETFs Europe II Plc zijn beleggingsmaatschappijen met variabel kapitaal opgericht als fondsen met afzonderlijke aansprakelijkheid tussen de compartimenten volgens de wetten van Ierland en erkend door de Central Bank of Ireland conform de Europese verordening van 2011 over instellingen voor collectieve belegging in effecten. U moet het prospectus en de essentiële beleggersinformatie (KIID) met betrekking tot specifieke SPDR-ETF's aanvragen en zorgvuldig lezen alvorens u belegt. Voor meer informatie en het prospectus/KIID met de kenmerken, kosten en risico's van SPDR-ETF's kunt u nu een prospectus of KIID downloaden, of kunt u deze documenten verkrijgen bij uw financieel adviseur of bij uw lokale SSGA-kantoor.
De in de VS gevestigde SPDR-ETF's die op deze site worden vermeld, zijn enkel toegelaten voor commercialisering in het relevante EER-rechtsgebied conform artikel 42 van de AIFMD (zoals omgezet in nationaal recht van die lidstaat); of kunnen anderszins rechtmatig worden aangeboden of verkocht (inclusief op basis van een verzoek van een professionele/gekwalificeerde belegger). Enkele in de VS gedomicilieerde SPDR-ETF's die op deze site worden vermeld, zijn alternatieve beleggingsinstellingen in de zin van de richtlijn van de Europese Unie inzake beheerders van alternatieve beleggingsinstellingen (Richtlijn 2011/61/EU) (“AIFMD”). SSGA Funds Management, Inc. en State Street Global Advisors Trust Company zijn de beheerders van alternatieve beleggingsinstellingen (“BAB's”) van deze fondsen.
Alvorens u belegt, moet u de beleggingsdoelstellingen, risico's, vergoedingen en kosten van de fondsen in overweging nemen. Een prospectus met deze en andere informatie kunt u downloaden of aanvragen bij uw financieel adviseur. Lees het zorgvuldig alvorens te beleggen.
SPDR® Dow Jones® Industrial Average ETF staat genoteerd en is geregistreerd voor verkoop in Nederland.