ECB manager reaction: credit markets rally on ECB stimulus measures

11/03/2016

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​Credit markets reacted with unambiguous positivity to the latest stimulus measures announced by Mario Draghi. The inclusion of bonds issued by non-bank corporations established in the euro area in the European Central Bank (ECB)’s asset purchase programme (corporate sector purchase programme – ‘CSPP’) has been well received by corporate bond markets. Both investment grade and high yield bonds rallied in the immediate aftermath of the announcements, a rally that showed more strength than the short-lived rise in equity and government bond markets.

At the moment, details are thin on the ground about the expansion of the purchase programme to include corporate bonds. However, Draghi has said that he expects these purchases to commence towards the end of Q2 2016 with some banks estimating that the universe of available bonds will be over €500bn.

The financial sector has been one of the underperformers in corporate bond markets so far this year. The ECB is clearly cognisant of damaging profitability and confidence in the banking sector by introducing a more deeply negative deposit rate (the rate at which banks can deposit excess reserves with the ECB) of -0.4%. To mitigate these impacts, it has reduced the refinancing rate (the rate at which banks can borrow money from the ECB) to 0%. It has also extended the targeted longer-term refinancing operations (TLTROs), which provides cheaper capital to the sector. From June 2016, the banks will be able to borrow money at or close to the deposit rate through this extended TLTRO programme. In an effort to stimulate the real economy, some banks are now effectively being paid to lend money.

With cheaper finance available elsewhere, it now seems unlikely that the significant issuance in senior bank bonds that we had expected this year will take place. However, on the back of the rally in credit markets, we are likely to see more subordinated capital issued with banks focusing on further additional tier 1 (AT1) issuance.

It is worth noting that the two points in the ECB’s statement that are most supportive for the credit markets (corporate bond purchases and the new TLTRO programme) are also those with the most questions still hanging over them. The ECB has yet to define exactly what it means by “non-bank corporations”, when and how it will purchase corporate bonds, and while “borrowing conditions in these operations (TLTRO) can be as low as the deposit facility”, will they be in practice?

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Janus Henderson Horizon Emerging Market Corporate Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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Janus Henderson Horizon Euro High Yield Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Global High Yield Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Total Return Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • Callable debt securities (securities whose issuers have the right to pay off the security’s principal before the maturity date), such as ABS or MBS, can be impacted from prepayment or extension of maturity. The value of your investment may fall as a result.

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