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Europe bondholders getting more cautious as ECB eyes exit


EUROPE bondholders are paying much closer attention to corporate borrowers as the central bank prepares to pull away a safety net that's aided steady marketwide gains for years.

The Italian bridge collapse, a Bayer AG court loss and Turkish turmoil have all whacked individual companies' bonds recently, fragmenting a market where huge European Central Bank (ECB) buying meant notes almost moved in tandem.

The greater concern about company-specific risks is also spurring investors to demand greater premiums on lower-rated notes.

There is "renewed awareness of how single-name blow-ups can at a stroke wipe out months of carry," Citigroup Inc analysts Matt King and Christopher Chapman wrote in a note. That adds to challenges in a market contending with rising volatility and meagre year-to-date returns, they said.

Bridge operator Autostrade per l'Italia SpA's bonds exemplify the potential for company risk as the Genoa disaster and Italian political instability have hammered notes that had moved little for years.

Bayer bonds tumbled after a US$289 million damages bill was slapped on unit Monsanto Co over claims that its Roundup weed killer causes cancer, while Banco Bilbao Vizcaya Argentaria SA and UniCredit SpA are among the names caught up in the Turkish selloff.

"Idiosyncratic risk will make a return," said Eoin Murray, head of investment at Hermes Investment Management, which oversees £33.6 billion (S$59 billion). Systemic risk has has been dominant "in recent years driven by central banks' giant liquidity punch bowl," he said.

The growing caution means that investors are starting to value quality again. The spread gap between the lowest and second-lowest tiers of investment grade debt - triple B and single A - has doubled from January lows to 50 basis points, according to Bloomberg Barclays indexes. The gap between single A and double A has widened to almost 30 basis points from 17 basis points.

Greater global market volatility, growing investor pessimism and the ECB's plan to stop nearly four years of asset purchases at year-end have also fuelled a five basis-point widening in euro corporate bond spreads this month, Bloomberg data show. The central bank has bought 165.9 billion euros (S$261.3 billion) of company notes in little more than two years, holding down borrowing costs and compressing spreads between different ratings tiers.

There are "early symptoms of a paradigm change" in euro credit, Marco Stoeckle, head of corporate credit research at Commerzbank AG, wrote in a note. "Idiosyncratic factors should also gradually regain importance." BLOOMBERG

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