THE ASCENT OF QUASIGOVERNMENT BONDS
Bond investors find it increasingly difficult to find attractive investment opportunities. On the one hand, the very low (and even negative) yield environment is likely to stay for long. The accommodative monetary policy stance, amplified by the negative growth impact of Covid-19, makes a meaningful rise in international yields very unlikely in the foreseeable future.
- The market value of euro-denominated quasi-government bonds has multiplied in recent years. Amid the rescue measures of governments in response to Covid-19, the importance of this asset class is set to increase further.
- The trend towards a lengthening of new issue duration and the high quality of the issuers make quasi-government bonds attractive for long-term investors eager to earn yield and preserve risk capital.
- Despite a diverse composition – agency, non-euro area government, local government, supranational and government guaranteed securities – spreads are driven by similar factors like sovereign indebtedness and policy uncertainty.
- Quasi-government bond spreads have already receded from the highs marked in spring. Despite concerns about surging supply, ongoing ECB purchases are expected to ensure market stability in the foreseeable future.
- Additionally, the higher spread level is forecast to contribute to an overperformance of quasi-government bonds versus both covered and core government bonds in the long run.