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Trump bond sell-off deals blow to ECB buying

Eurozone corporate bond risk premiums have jumped to their highest level since July, as Donald Trump’s victory in the US election effectively erases gains generated by the European Central Bank’s policy of buying companies’ debt.

A sharp rise in global bond yields since Mr Trump’s triumph has also spurred an underperformance of European credit relative to the US corporate debt market.

Higher corporate credit spreads in euros, which measure the risk of company debt compared to a benchmark rate, come despite ongoing purchases by the ECB which began buying in June and initially drove down borrowing costs for the continent’s companies. The ECB has purchased €44bn of corporate bonds so far.

“The benefit that accrued to [European] companies as a result of [ECB purchases] has been offset by various factors that have come into play since the election of Donald Trump,” said Zoso Davies, a strategist at Barclays.

The spread on the Bloomberg Barclays euro aggregate corporate index has risen to 77 basis points this week, compared to 65 basis points immediately before the election. Over the same period, spreads on investment grade corporate bonds in the US have edged lower.

Analysts expect a Trump presidency will benefit US companies more than competitors in Europe. The president-elect’s polices include a large cut in US corporate tax rates and also incentives for companies to repatriate profits generated overseas.

“US credit has done better from Trump’s victory than European credit,” Mr Davies added. “US equities have done better than US equities. It lines up with the stated thrust of his policy, America first. If his policies, whatever they’re going to be, put America first, benefits should accrue to US companies.”

Spreads on European corporate bonds have also weakened in the face of a looming calendar of events high in political risk, including a referendum in Italy next month and elections in France in 2017, as well as an eagerly awaited ECB meeting in December.

Over recent weeks, yields on the bonds of periphery eurozone countries have widened as well. The Italian government bond yield has risen to over 2 per cent in November for the first time in more than a year.

“Unlike in the euro market, the USD market doesn’t have these peripheral versus core market dynamics,” said Armin Peter, global head of syndicate at UBS. “There is a renewal of the awareness around political risk around the weeks to come.”

Weakness for European corporate bonds comes against a backdrop of rising government bond yields and increased expectations of inflation in the near future. Last week, a Bank of America Merril Lynch survey showed that inflation expectations among portfolio managers had reached their highest level in more than a decade.

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