We remain supporters of peripheral European bonds – BlackRock’s Thiel
Scott Thiel, deputy Chief Investment Officer of Fundamental Fixed Income and head of the Global Bond Team at BlackRock, comments on yesterday’s ECB and MPC announcements.
Following the surprise interest rate cut last month, yesterday’s European Central Bank (ECB) meeting was comparatively uneventful. We continue to think it likely that they will announce a new long-term refinancing operation (LTRO) in early 2014, though President Draghi downplayed the urgency of such measures and emphasised that any additional liquidity provision would have to involve incentives for lending to the real economy.
We are currently short or underweight German Bunds in our portfolios versus long or overweight positions in certain semi-core countries.
In the last few days both Moody’s and Standard & Poor’s improved Spain’s outlook from negative to stable, while retaining their BBB- and Baa3 ratings respectively. We remain supporters of peripheral European government bonds and actively trade our positions here based on both fundamental and strategic drivers. Currently we prefer to express our views via Portugal, Slovenia, Ireland and Italy. In addition, given our overall positive view of the eurozone, while cognisant that there are still many event risks out there, we retain our short Swiss franc position against the euro as safe haven flows continue to be unwound.
The Bank of England also kept its monetary policy stance unchanged. In addition, the Chancellor gave his Autumn Statement, in which the government’s outlook for GDP growth was revised upwards for both 2013 and 2014. We remain short or underweight UK gilts.
November was important for China, where the Communist Party’s Central Committee held its Third Plenum. A publicly released statement after the meeting said that the role of the free market would be increased, including encouraging private investment in state-owned enterprises, interest rate and capital account liberalisation and greater land ownership rights for farmers.
Overall, November was a relatively quiet month for fixed income markets, particularly when compared to the volatility of the preceding few months around the prospect of the US Federal Reserve (Fed) starting to reduce or ‘taper’ its asset purchase programme.
Market consensus is now for this to begin in March. In our view this presents further scope for volatility as the market continues to focus on US economic data and there is (an admittedly outside) risk that the Fed could reduce QE as early as this month. All eyes will certainly be on today’s nonfarm payroll release. Yesterday data showed an upward revision in the pace of real GDP growth in the US in the third quarter, which was revised up from a quarterly annualised rate of 2.8% to 3.6%.
Regardless of which month the Fed chooses to begin tapering, we are entering a new environment of monetary policy dispersion between the major central banks, with not only diverging policies but also different objectives. For us, this creates some very interesting investment opportunities.