European Bond Research - Mach 27, 2019

ECB’S PRESIDENT, MARIO DRAGHI HINTS AT DRAWBACKS OF NEGATIVE RATES AS BANKS START TO WORRY about the adverse effects of negative interest rates. Expectations of easier monetary policy have pushed government bond yields below zero, meanwhile, cheaper cost of borrowing capital has raised risks of housing bubbles in part of Europe. European bank stocks have fallen around 30% since the start of 2018 since lower interest rates induce compressed profit margins. Rates are expected to stay where there are for many months, laying the foundation for negative interest rates for years to come.  The ECB targets an annual inflation of just under 2%, it is currently at 1.5%. The UK 10-year Gilt declined one basis point. FTSE 100, -0.41%, STOXX Europe 600 -0.64%, CAC 40 -0.28%, German DAX -0.29%. 

EU AMBASSADORS BACKED NEW RULES TO “FACILITATE BANKS’ SALES OF BAD LOANS ON THEIR BOOKS” but failed to agree on a reform that would make it easier for lenders to recover assets from borrowers who default.  The agreement reached will help purchase and service non-performing loans (NPLs), which will lead to “the development of efficient secondary markets.”  There is a backlog of more than 700 billion euros hanging over EU banks’ balance sheets, specifically at lenders in Italy, Greece, Ireland and Cyprus. Among European high-grade bonds showing a concurrence of top price gains at appreciable volumes traded, HSBC Holdings PLC (USD) 5.25% 3/14/2044 made some analysts' 'Conviction Buy' lists. (See the chart for HSBC Holdings PLC bonds below). Niral Mehta (nmehta@advantagedata.com).

Country	Maturity (Y)	Yield (%)	Previous (%)	Spread (bp)
Australia	10	1.791	1.844	-62.2
Belgium	10	0.441	0.430	-197.2
France	10	0.358	0.345	-205.5
Germany	10	-0.026	-0.011	-243.9
Italy	10	2.509	2.450		9.6
Japan	10	-0.084	-0.073	-249.7
Netherlands	10	0.070	0.071	-234.4
Portugal	10	1.288	1.260	-112.6
Spain	10	1.106	1.071	-130.8
Sweden	10	0.238	0.212	-217.5
U.K.	10	0.988	1.016	-142.6
U.S.	10	2.413	2.442	...

New Issues

New Issues [Continued]

1. Erste Group Bank AG (EUR) 0.5% 3/26/2026 (03/25/2019): 50MM Senior Unsecured Notes, Price at Issuance 100, Yielding .5%. 2. Banque Cantonale de Geneve (CHF) 0.125% 4/23/2026 (03/25/2019): 120MM Senior Unsecured Notes, Price at Issuance 100.419, Yielding .07%. 3. Volkswagen Financial Services AG (EUR) 0.625% 4/1/2022 (03/25/2019): 1100MM Senior Unsecured Notes, Price at Issuance 99.678, Yielding .73%.

DATA CHECK:

iShares Core EUR UCITS	iShares Euro High Yield UCITS
NAV as of 03/27/2019, 131.06	NAV as of 03/27/2019, 102.99
Daily NAV Change (%) +0.24%	Daily NAV Change (%) +0.11%

OVERALL EUROPEAN CREDIT MARKET:
The euro-zone economy shows signs of positive momentum, although conditions are expected to deteriorate hindered by the termination of quantitative easing, weakening credit rating quality, and uncertainty regarding the outcome of Brexit. Closely watched indicators and rates:

• Eurostat's unemployment rate: currently 7.8% (seasonally adjusted, January 2019)
• Eurostat's quarterly GDP: 0.2% (2018 Q3 Final)
• 6-month Euribor: current value -0.228%, as of 03/26/2019

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