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New Year calls for a new perspective in bonds

The European FIG market got off on the right foot this week, with issuers learning from mistakes made toward the end of 2014 and offering larger premiums to cash-rich and yield-strapped investors that want to put their money to work before yield targets get even harder to hit responsibly.

Good on them for ringing in the New Year with a resolution to give investors some relative value for their money, even if it is very relative — this week a 10 year bond sold with a coupon of 1.25%, but at a spread of around 10bp over its benchmark, which market participants said was fairly generous, given the conditions.

We all know that new year resolutions don’t last, and that issuers will sooner or later start turning the screws on spreads again. Investors may soon find themselves tweezing whatever relative value they can from flattening maturity and credit curves, especially if, as many feel certain, the European Central Bank drives yields lower with a programme of quantitative easing.

And with a host of other geopolitical and macroeconomic balls in the air, investors would do well to choose carefully on other metrics besides spread, as they will be likely be facing highly volatile and historically illiquid markets this year.

Those that have focused on higher duration have been rewarded, and probably will continue to be as the long end continues to flatten in expectation, and perhaps, later, experience of, QE.

But scepticism is growing over the usefulness of QE as a tool of growth in the eurozone, and with the region now technically in deflation, the future fundamentals of many European assets should be questioned thoroughly. Is what you are holding worth, in the longer term, even the pittance it’s paying you now?

With that in mind, more investors need to make their own new year’s resolution and start factoring their investments’ liquidity heavily into their relative value assessments.

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