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Retail investors have fled high grade European bonds at their fastest weekly rate in seven years according to analysis from JPMorgan, highlighting escalating fears over a packed roster of major elections in the coming months.
Over €1bn was pulled from investment grade euro corporate funds last week, according to the US investment bank, which is warning of the “non trivial risk of hitting an electoral landmine” in the continent this year.
The outflow was the largest weekly withdrawal according to data going back to 2010. The €1.04bn redemptions exceeded the €1.02bn withdrawn during the height of the Volkswagen emissions scandal in September 2015.
Eurozone corporate credit has rallied strongly over the last year following the European Central Bank’s move to dip its toes in the market earlier last year as part of its quantitative easing measures.
But the rally is in jeopardy ahead of elections in the Netherlands, France, Germany – three of the EU’s founding member states – over the next six months.
Foreign investors seem to be responsible for dumping high-grade company bonds, according to Matthew Bailey at JPM, who recommends investors “take profit before the election cycle gets into full swing”.
“Spreads now only provide just enough compensation for political risk,” said Mr Bailey.
Developments in the corporate bond market are threatening to mirror those seen in government debt market where “rednomination risk” has driven the yield gap between France and Germany to a four-year high
In the corporate bond market, “if redenomination fears do begin to resurface, we think that heavy outflows and selling by foreign investors could still drive spreads wider”, added Mr Bailey.
The electoral triumph of a populist leader in the form of France’s Marine Le Pen or Geert Wilders in the Netherlands would likely see the European Central Bank ramp up its stimulus measures, added Mr Bailey.
Still, he thinks more central bank bond buying would be “unlikely to be sufficient to prevent investment grade spreads from moving back above 100bp”.