Global bank bonds are enjoying their strongest monthly rally in nearly three years after the European Central Bank injected €489bn into the eurozone’s banking system, averting a liquidity crunch that could have undermined efforts to boost economic growth.
The total return for the bonds of European financial companies is 3.5 per cent so far in January and it is about 3 per cent for US financial debt, both on track for the biggest monthly return since July 2009, according to indices from Barclays Capital.
The bank bond rally highlights how the LTRO has helped lift investor sentiment in Europe and beyond after a difficult second half to 2011, when European banks struggled to raise funds in the wholesale market. More than 500 banks across Europe bid for €489bn in three-year loans from the ECB in December. A second tranche of the LTRO is due in February.
The recovery in the bank bond market has been mirrored in the equity market, with European and US banks bouncing off their start-of-the-year levels.
“The LTRO turbocharged the market, removing some of the question marks in terms of bank redemptions and supply,” said Mark Geller, head of the financial institutions syndicate at Barclays Capital in London. He said the better sentiment was being reflected in a substantial rally in bank bonds, as well as corporates, and a fall in the cost of insuring against defaults.
Markit’s iTraxx Senior European Financials index, which looks at the credit default swap spreads of a basket of big European banks, shows that the cost of insuring against default stood at 215 basis points on Friday from about 340bp in the middle of November.
Improved sentiment has prompted some large institutions to sell bonds in the US, taking the monthly total to $37bn, the most since last May, according to Dealogic, the data tracker. Goldman Sachs, for example, recently sold $4.5bn, its largest ever unsecured bond deal, Dealogic said.
In the second half of last year, investors sat on their cash as they watched the eurozone crisis unfold. Adam Bothamley, head of European debt syndicate at HSBC in London, said that the LTRO was “the catalyst that dragged investors back” in to the bond market.
Some analysts warned, however, that the market may be ignoring the significant downside risks in Europe, with the threat of a sovereign default still looming over Greece and now Portugal. “A lot of investors are very in need of income,” said Jason Brady, a portfolio manager at Thornburg Investment Management. “With the Federal Reserve saying they are going to be on hold for what seems like a lifetime, it incentivises people to take risks of all sorts.”
Additional reporting by Ajay Makan in New York
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