Comments on today’s ECB meeting and global fixed income themes from the Global Unconstrained Bond team ….
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By Marilyn Watson Head of Global Fundamental Fixed Income Strategy
Superficially, re-reading my final bullet for 2015 (3rd December 2015), there are incredible similarities. Then I wrote: “it is striking how little major central bank rates and government bond yields had moved comparing snapshots of January 1st to December 1st, given how much noise and volatility we witnessed in global fixed income markets during 2015”.
Then, as in 2016, investors had spent the entire year trying to gauge when the US Federal Reserve (Fed) would raise rates while a range of unexpected events punctuated the stability of markets. However, this year’s volatility-raising events have been very different in cause and nature and I would argue that the financial and political landscape going into 2017 is considerably different to the one that entered 2016.
Today’s ECB meeting was pivotal for European bond investors. After minimal guidance from the ECB on the outlook for their monetary policy stance for some time, the Governing Council finally announced that it will extend its asset purchase programme beyond March 2017 until the end of the year, albeit at a reduced rate of €60bn per month in the extended period (from €80bn). Key interest rates remain unchanged.
This is effectively tapering in our view, although during the press conference President Draghi vehemently denied this. However, the ECB also noted that the size or duration of purchases would be increased if inflationary or financial conditions become “less favourable”. The new staff forecasts predict eurozone inflation of 1.7% in 2019.
To facilitate the extension of QE, some significant changes to the modality of the programme were unveiled. As of January 2017, the minimum remaining maturity for bond purchases will be reduced from two years to one and the ECB can buy assets yielding below the deposit rate (currently -0.4%).
The ECB’s announcement, in our view, continues a trend among major central banks of moving away from ever-looser monetary policy stances.
Most advanced in this dynamic is the Fed, which increased rates in December 2015 and we believe will hike again this month. Elsewhere, the Bank of Japan has moved to “QQE with yield curve control”, marking a shift away from an emphasis on negative rates towards anchoring the yield curve, while Bank of England Governor Carney communicated a more balanced stance in November following the easing measures taken in the wake of the UK’s EU referendum.
Politics looks set to dominate market moves next year. There is currently a great deal of uncertainty and lack of clarity around, to name just a few hot topics, the new Trump administration, Brexit negotiations, consequences of the recent Italian referendum and general elections in the Netherlands, France and Germany.
In the global bond fund range, we are positioned for a steeper German Bund curve, are short or underweight French government bonds versus Bunds and have relatively small positions in peripheral sovereign bonds. Elsewhere, we retain our favourable view of inflation-linked bonds, particularly in the US and UK.
Bond yields have increased, overall, since the US election and emerging markets have generally sold off quite significantly. We continue to favour EM bonds where we expect monetary policy easing, although have reduced the maturity of many of these positions. We also retain our positive view on India, where we are long local currency bonds and have an active long position in the rupee.