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
Today, as expected, the ECB maintained the deposit rate at -0.4%, the main refinancing rate at zero and the marginal lending facility at 0.25%. No changes in any form were announced to the current monetary policy stance. We must also wait until September for the next ECB staff macroeconomic projections for the eurozone.
While very little had been anticipated by the market, some questions in the press conference focussed on the future availability of eligible bonds for the ECB’s QE programme. Given the declining net supply of some of these bonds, we expect tweaks to the flexibility of the asset purchase programme to be announced this year.
In terms of our sovereign bond positioning in Europe, we retain a preference overall for peripheral European debt. We are positioned for a flattening of the long end of the Italian curve and have a favourable view of Italian inflation-linked bonds. In addition, we believe that the spreads between Portugal, Slovenia and Greece versus Germany have scope to compress in the coming months.
In the investment grade space, we have held a positive view on subordinated core European corporates and financials for some time, with the view that the ECB’s supportive monetary policy stance will continue to provide a beneficial backdrop for these assets.
On 14th July the Bank of England (BoE)’s Monetary Policy Committee, in its first official meeting since the UK’s referendum on the EU, elected to keep Bank Rate unchanged at 0.5% and no change to the total size of the Asset Purchase Programme at £375 billion. Governor Carney has been very vocal that the BoE will do whatever it takes to ensure economic stability following the country’s decision to leave the EU and we expect a cut in interest rates and potential extension of QE in the coming months. The next important date to keep an eye on will be 4th August, when the BoE releases its quarterly Inflation Report and announces its next monetary policy decision.
Since the initial surprise in financial markets to the outcome of the EU referendum, we have added to our gilt exposure both in relative and absolute terms. We believe that some additional form of QE from the BoE would include purchases of gilts. Although much uncertainty about the political process remains we are closely monitoring the impact of the referendum on the UK economy, noting the strength of the labour market into the end of May. On balance, we believe the pound’s current level reflects much of that uncertainty and we are modestly long.
In the US, we remain positioned overall long US duration. Fed communications continue to stress a slow, cautious and data-dependent approach to rate normalisation and, in our view, longer-dated treasuries (as well as securitised assets and some high yield debt) continue to offer attractive risk-adjusted sources of carry which leads us to retain our curve flattener.
Finally, we see idiosyncratic opportunities in emerging market rates and FX, especially in the local bond markets of Indonesia and India.