[LONDON] BlackRock is taking advantage of recent outperformance in European credit markets to sell some junk bonds there and buy more in the US in its global funds.
That’s according to James Turner, co-head of European fundamental fixed income at BlackRock. The world’s biggest asset manager, with US$11.5 trillion of assets, is making the changes in its global funds to now be more evenly weighted between Europe and US, where previously it favoured Europe.
The yield premium that investors demand to hold US junk bonds rather than Treasuries widened sharply recently as investors fretted that President Donald Trump’s tariffs would weigh on growth there. While European junk bond spreads have also widened, they have been cushioned by hopes that government spending on defence and infrastructure, led by Germany, will give a torpid economy the boost it needs.
“European spreads have been outperforming US spreads recently and now they’re really on top of each other. At these levels, it feels like the European overweight we’ve had for the last six months doesn’t make sense in our global funds,” Turner said in an interview. The rebalancing is also driven by expectations that the European Central Bank may not cut rates as aggressively as previously thought.
BlackRock remains positive on European fixed-income assets, Turner and his fellow co-head of European fundamental fixed income, Simon Blundell, said in a report on Monday (Mar 24). They highlighted high-quality segments of the European securitised market such as collateralized loan obligations as offering attractive risk-adjusted returns.
“We believe credit fundamentals are robust, supported by strong earnings in recent quarters – while default rates remain low,” they said in the report.
Cash opportunity
BlackRock sees an opportunity in the huge multiyear-high cash piles that have accumulated in recent times; they reckon US and EU money market assets sit at US$7 trillion and US$1.3 trillion, respectively. Investors can switch from cash to fixed income and, unlike in the easy-money era, they no longer need to extend duration or accept lower credit quality to be rewarded, they said.
“In the current market, we do not see a need to stretch for this last drop of yield,” they said in the note. BLOOMBERG
