Anticipation is running high for the ECB’s LTRO 2.0 due on Feb 29.

The first such operation in December has largely benefited peripheral bonds even though estimates show banks used a bulk of their borrowing (seen at  just 150-190 bln euros on a net basis) to repay their debt, as the graphic below shows.



At the second LTRO, banks are expected to use the proceeds to pay down their debt further. That is a good news for non-bank corporate credit because banks — busy deleveraging — are more likely to repay existing debt than roll over and existing holders of bank debt will need to look elsewhere to allocate their assets.

“Apart from the shrinking size of (European bank bonds) some investors might want to get out of them anyway and allocate assets somewhere else… Credit spreads are pricing in a very pessimistic scenario. There’s a very good value in non-banking credit,”┬ásays Didier Saint-Georges, member of the investment committee at French asset manager Carmignac Gestion.

High yield corporate debt has already rebounded quite strongly since January, with year-to-date inflows into funds investing in this asset hitting $2.2 bln, according to estimates from Bank of America Merrill Lynch.

“Clearly we do like a BB+ rating because when credit conditions improve that’s where you get the best leverage. When conditions improve, double-B is perceived to be upgraded to investment grade,” Saint-Georges says.