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As U.S. Investment-Grade Corporate Bonds Push Toward Yields of 4%, Will Eurozone Corporate Bonds Ever Make it to Even 1%?

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As U.S. Investment-Grade Corporate Bonds Push Toward Yields of 4%, Will Eurozone Corporate Bonds Ever Make it to Even 1%?

The European Central Bank (ECB) announced last Thursday, April 26, 2018, that it would maintain its monetary policy and bond-buying program, as growth in the eurozone slowed in the first quarter. The ECB corporate bond purchases have pushed yields in the region to their lowest since the financial crisis. Inflation targets in the region are not expected to be reached and monetary stimulation could continue for longer than expected. Corporate bond yields are dramatically lower than comparable U.S. and UK markets. Investors in the region have speculated on the effect a cut in monetary stimulus would have on the asset class. Today’s announcement continued the uncertainty and the likelihood that eurozone corporate bond yields are not poised to rise anytime soon.

The U.S. investment-grade corporate bond market has seen yields getting progressively higher with the U.S. Fed Rate hikes over the past year. The S&P 500® Investment Grade Corporate Bond Index, which is designed to measure the performance of U.S. corporate debt issued by constituents in the S&P 500 with an investment-grade rating, yielded 3.85% as of April 25, 2018—rising 74 bps year-over-year. Meanwhile, the S&P Eurozone Investment Grade Corporate Bond Index has seen its yield rise only 1 bps in the past year, going from a yield of 0.77% to 0.78%. The eurozone index yield sank to lows of 0.50% back in November 2017. The option-adjusted spread (OAS), which measures the spread over a risk-free rate (usually a treasury/government bond), for both indices has tightened in the past year between 8 bps and 16 bps, showing the effect the ECB’s bond purchasing program has had on eurozone corporates. German bunds have largely been range-bound in the sub 0.10% level, while U.S. Treasury yields have risen nearly 100 bps in the past year. Despite concerns that the asset class could be subject to a correction once the ECB switches monetary policy, and despite the attractiveness of higher rates in the U.S., a weaker-than-hoped-for European economy may keep corporates below the 1% level for longer than expected.

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