Bond investors wary of yield trap heeding ECB alert

Europe’s biggest fund managers are heeding policy makers’ warnings that an “excessive” search for yield is making bonds from companies in the region’s most indebted countries vulnerable to a selloff.

Pioneer Global Investments Ltd., which oversees $246 billion, said it cut holdings of corporate notes from most peripheral nations, while SEB AB in Stockholm, the manager of $191 billion of assets, lowered its recommendation to neutral from overweight. BlackRock Inc., the world’s biggest money manager, is underweight, while Amundi, the region’s largest asset manager, says it’s being more selective.

European Central Bank policy makers issued the bond-market alarm in their May financial stability review, as the recovery in the 18-nation euro region struggles to gather pace amid subdued pricing power and weak credit. Speculation the bank will ease policy further at its Governing Council meeting on June 5 helped push down yields on peripheral company debt to a record 1.58 percent last week, according to Bank of America Merrill Lynch data.

“It feels like walking into a trap,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “Any little scare could make investors sell and if everyone wants to exit, there’ll be no liquidity.”

Crowded Trade

Buying bonds from Europe’s most indebted countries is the most crowded trade, according to 35 percent of fund managers surveyed last month by Bank of America Merrill Lynch. That’s up from 19 percent in April. Investors have been content to buy the notes since the easing in the sovereign debt crisis in mid-2012, the ECB said in its review.

“An excessive search for yield, which from a financial stability perspective, could make bond...