ECB policy: Caution on bond markets warranted says Blackrock’s Thiel

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Scott Thiel (pictured), head of the Global Bond Team at BlackRock comments on the latest ECB monetary policy commission meeting.

No changes were made to the European Central Bank (ECB)’s monetary policy stance today. The main refi rate remains 0.15%, the deposit facility rate is still negative at -0.1% and no new policy announcements were made.

However, in the press conference that followed, President Draghi made some interesting observations, among which: he acknowledged that ECB and US Federal Reserve (Fed) monetary policy stances would diverge for a long time (one of our favourite investment themes); that data suggested a slowing of growth momentum in the euro area; that fundamentals for a weaker euro ‘are much better’; and that any future QE programme initiated by the ECB could include the purchase of asset backed securities (ABS).

We are currently cautious towards the global bond market environment. We see the potential for volatility and liquidity issues to arise once markets begin to focus on the large imbalances that have occurred from rates being so low for such a very long time, particularly by the Fed and Bank of England (BoE).

We do remain short or underweight gilts and long GBP, on the expectation that the Bank of England will be the first major central bank to raise official interest rates (currently at 0.5%). The BoE kept interest rates on hold at today’s meeting of the Monetary Policy Committee.

We are now roughly neutral in the European periphery, cognisant not only of the recent spread compression but also the switch in market focus from fundamentals to ECB support in the eurozone.

There has been a lot of attention on Portugal in recent weeks, given the losses at the country’s largest lender, Banco Espirito Santo. We took profit on our overweight position in Portuguese sovereign bonds ahead of the June ECB meeting. In the last few days, the government announced a plan along with the European Union to rescue the bank. However, ratings agency Moody’s upgraded Portugal to Ba1 (one notch below investment grade) on 25th July1, citing among other things a strong government commitment to fiscal consolidation, regained market access and a comfortable liquidity position.

We retain our long-standing preference for being overweight subordinated European bank debt. Both the new targeted longer-term refinancing operations (TLTROs) and the potential ABS purchases announced by the ECB should be positive for European banks, which would support this view.


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