Kempen: Fixed income investing after ECB corporate bond purchases

In early June, the European Central Bank (ECB) formally started its corporate sector purchase program (CSPP) as part of its quantitative easing measures.

The program aims to boost the eurozone economy and lift inflation to the bank’s target of 2% as the ECB buys corporate bonds issued by companies in the euro area.

Since the start of the CSPP program, the central bank has bought corporate bonds worth €7bn to €8bn per month. But, as noted by the results of a recent InvestmentEurope online poll, 50% of investors are concerned about the ‘crowding out’ effects of the ECB’s bond purchasing.

Roul Haerden, senior portfolio manager at Kempen Capital Management, said the asset manager has already looked beyond traditional investment grade fixed income as a result of the ECB’s action and the general ongoing squeeze on yields.

“We have been already looking for other asset classes, for example US corporate bonds, high yield bonds, bank loans and direct lending,” Haerden said.

The portfolio manager highlighted Dutch mortgages as an “interesting” investment in the local market.

As a result, a significant number of institutional investors have moved to the Dutch mortgage market, because of its attractiveness in terms of yield and low level of expected loss in case of default.

“The spread of Dutch mortgages against swaps is still between 160 to 240 base points depending on the maturity and type of mortgage, which is quite attractive compared to the yield you can receive on Euro corporate bonds,” Haerden said.

Some institutional investors have also diversified their exposure into US investment grade corporate bonds, which can be an attractive asset class as well, Haerden said.

“On the one hand I see a search for higher yield and on the other hand it is also worth mentioning that lots of investors are restricted to enhance that yield even further, because of the low current coverage ratios they have, especially for Dutch pension funds,” he said.

“In the last few years, a lot of Dutch pension funds saw their coverage ratios decrease below 100%. They don´t have that much leeway anymore to increase the risk budget because some of these pension funds are required to post additional recovery plans to the Dutch regulator because of their underfunded status.”

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