BofAML _ sobre crédito y política en Europa

Redacción - Jueves, 12 de Enero

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The European Credit Strategist: Yielding to populism
•   We think Q1 could be a weak quarter for Euro IG spreads as corporates front-load issuance.
•   We think the ECB may be "overweight" utilities, Spanish credits and Italian names.
•   Euro credit spreads look tight for the level of political risk, especially French, Spanish and UK credits.

Bad technicals for Q1

We think "populism" will be the buzzword for credit markets in '17. But we think populism got the better of ECB at the end of last year by prompting it into less QE.In our view, this means weaker technicals ahead, and less CSPP buying from April this year. Thus, we think the trade is to own non-eligible over eligible credit sectors in '17 (i.e. fins over corps, sub over senior, high-yield over high-grade).

Here come the bonds

We think an obvious reaction by issuers to this "closing of the gates" by the ECB is to front-load supply into Q1 this year.Signs are that this is happening already. But with our latest Credit Surveyshowing investor cash levels being far below average now, we expect Q1 to be a quarter of messy technicals, and therefore of spread widening.

Be careful with what the ECB has bought

As the CSPP technical begins to wane, we think it's the names that the ECB has purchased the most of that could be subject to the biggest widening pressure.But looking at purchase data, we sense that the ECB may be "overweight" some sectors, and we wonder if politics have motivated this. For instance, the ECB seems to have more in the way of utility bonds, and likewise for Spanish and Italian credits. The ECB also seems to be long duration in Euro credit- so we thinkcash curves will see steepeningpressure this year.

Populism is not in the price

What 2016 has taught us is that populism means political risk: more insular thinkingby officials, less global leadership, a potentially weaker institutional architecture, and traditional political parties sounding more populist in response. But we believe that credit spreads look rich for the current level of policy uncertainty- and ECB QE has of course helped drive this. Interestingly, we find that it's French, Spanish and UK credits that are the most disjointed (i.e. spreads are tight for the political uncertainty).

Economic policyuncertainty vs. Euro credit spreads, by country

Source: Bloomberg, Economic Policy Uncertainty Indices. We highlight those countries that are large credit market issuers.

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