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Should you buy sterling credit as an ECB-hedge?

“The biggest market risk for me at the moment is that the ECB would not extend its current asset purchasing programme. This would be horrible for corporate bonds,” said Marc Herres, manager of the Union Investment UniInstiutional Corporate Hybrid Bonds fund, addressing a crowd of fund selectors at the Expert Investor Denmark forum in Copenhagen.

Drug addicts

He admitted fixed income markets have become addicted to ECB support, and would collapse without receiving monthly injections.  

“European corporates are in good shape, but that doesn’t explain the excessively low yields you see now. Deutsche Bahn just placed a 5-year bond with a negative yield. We’re now having to pay for the privilege of lending to a company money. That’s weird.”

For now, European investors seem to count on the ECB extending its purchasing programme, however. From March to the end of September, they invested a net €14.6bn in euro-denominated investment-grade corporate bond funds. But this trend is set to reverse over the coming months according to Expert Investor data. Fund buyers who plan to decrease their exposure to the asset class outnumber those who want to increase their allocation by three to one.  

Pound foolish?

How should you protect yourself against the threat of the ECB withdrawing bond market support? One way to do so is by increasing exposure to sterling investment-grade bonds. Sterling? Isn’t that the world’s second worst performing currency year-to-date? Right. Though Brexit has put relentless pressure on the pound, it has also prompted strong technical support for bonds from the Bank of England (BoE), noted Herres.

Part of the Bonhill Group.