Euro investment grade credit funds reached their highest pace of inflows for two years last week, the ninth week in a row that flows have been net positive. Investors say corporate yields have got high enough to justify them piling into the asset class, especially now that there are signs of inflation cooling.
Around €2.4bn-equivalent was moved into investment grade euro funds last week, the biggest weekly inflow since June 2020, and about €1bn more than the previous week, according to Commerzbank.
This inflow is expected to continue into next year, which should force spreads tighter.
“While recessions in Europe and the US should weigh on corporate fundamentals and lead to more downgrades and higher defaults, they won't override the bigger theme of yield-driven inflows driving euro IG spreads tighter,” said Marco Stoeckle, head of credit strategy at Commerzbank in Frankfurt.
This matches what syndicate bankers have seen in the primary market since November, with investors being less strict on pricing because they feel confident that the entire market will move tighter from next year.
Cash plus 2%
At six to eight year maturities, high grade corporate credit yields 4% to 6%, while cash yields around 4%.
“We’re pretty much now fully invested,” said a fund manager in London. “If you’ve got cash yield plus 2% on top of that, you are getting a decent yield for not taking too much credit or maturity risk.”
However, the news is not so good for high yield, as the sort of yields junk rated companies need to pay to attract investors away from safer asset classes quickly becomes unsustainable for the borrower.
“Once those high yield companies come to market and you plug in the high teens yield that they’re currently yielding, those figures don’t really work,” said the fund manager. “We still feel that cash crowds out other asset classes including high yield.”
Some investors believe the beginning of quantitative tightening could put an end to some companies.
“What we’ve seen over the last 10 years is quantitative easing really keeping zombie companies alive,” said the fund manager, echoing the sentiment of two rivals. “It’s going to be the complete reverse over what we’ve seen over the last 10 years.”