December 3, 2012 / 2:40 PM / 5 years ago

Solvency II to weigh on corporate bond spreads - AXA

LONDON, Dec 3 (IFR) - Solvency II, responsible for an ongoing EUR500bn asset shift towards credit and away from equities, could drive corporate bond spreads 60bp tighter over the next five years, AXA investment management strategists said on Monday.

The structural tilt in the market towards debt securities would continue to encourage insurers to reduce equity exposure in favour of less volatile short-term fixed income assets - like corporates, said AXA strategists Mathieu L‘Hoir and Mathilde Sauve in a report.

Although not yet fully implemented, the incoming regulation has already raised corporate bonds’ appeal as a low-risk asset class, reflected in a 80bp contraction on spreads since 2009.

The iTraxx Main index has tightened by 30% since the start of 2009 and the iTraxx Crossover by a staggering 52%, and these low funding costs have encouraged corporations to issue EUR212bn of bonds in 2012.

Strip out speculative grade deals, and supply drops to around EUR180bn, still enough to outpace volumes for every year in the last decade, except 2009 when companies rushed to build precautionary cash buffers in the wake of the sub-prime crisis.

Solvency II, AXA says, could potentially bring down spreads by a further 60bps, fuelling this supply wave anew and leading to more funding records being broken.

Barclays strategists said on Monday that they expected non-financial credits to issue EUR230bn worth of bonds next year and other banks have made similar predictions.

Even though sovereign bonds have traditionally been regarded as the safest asset class, AXA says government debt is unlikely to be impacted as much.

“The estimated impact of rebalancing inflows is negligible,” L‘Hoir and Sauve write. They say that governments bonds have seen a spread contraction of less than 10bp since 2009 - clearly eclipsed by the contraction of corporate spreads.

Implementation of Solvency II is currently slated for January 2015, but last month, Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA) said it was unlikely Solvency II would be brought in before 2016.

However, he did say that EIOPA was looking at adopting some elements of the new rules before the start date, according to Reuters. (Reporting By Josie Cox; editing by Alex Chambers and Anil Mayre)

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