BlackRock sees European corporate bonds as top credit opportunity

BlackRock Inc. is highlighting European corporate bonds as one of the most attractive opportunities in global credit markets, citing stable economic conditions, strong corporate fundamentals, and yields near 3% as a rare source of relatively safe income.

“Companies still look in quite good shape overall,” James Turner, BlackRock’s co-head of global fixed income in EMEA, told Bloomberg. “There’s not many opportunities to find relatively safe yield at the moment.”

In its fourth-quarter fixed income outlook, the world’s largest asset manager pointed to favourable inflation trends, broadly aligned with the European Central Bank’s 2% target,  as well as improving growth prospects and sustained investor interest in credit.

Although the market is “priced for perfection,” BlackRock believes there is still room for profit. Overall yields on European investment-grade corporate bonds are hovering around 3%, according to a Bloomberg index, while spreads over government debt are near 78 basis points — close to the tightest levels since the 2008 financial crisis.

In this environment, the firm is emphasising the importance of selectivity.

“The compelling income levels suggest that more meaningful opportunities lie in sector allocation and security selection,” Turner and his co-head Simon Blundell wrote in the report.

BlackRock favours sectors it views as more insulated from macroeconomic risks and trade disruptions, specifically banks, utilities, and technology, media, and telecommunications.

Europe has seen record corporate and sovereign debt issuance this year, with companies taking advantage of heightened investor demand to secure low-cost funding. Despite tight spreads, investors continue to show confidence in the credit strength of European corporates.

Still, BlackRock warns that tight pricing leaves little room for error, and any unexpected negative developments could trigger sharp market movements.

By Sabina Mammadli