ECB meeting: Blackrock’s Thiel overweight on subordinated bank debt

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Scott Thiel (pictured) Deputy Chief Investment Officer of Fundamental Fixed Income and head of the Global Bond Team comments on the latest ECB meeting.

Today from Naples, the European Central Bank (ECB) provided more clarity on its ABS and covered bond purchase programmes as well as its view on the initial take up of the new targeted long term refinancing operations (TLTROs).

The ECB also confirmed yesterday’s press leak that both purchase programmes will include all member states – including Greece and Cyprus – as long as those two countries remain in EU assistance programs. The ECB clarified that the rating criteria applied to collateral for monetary policy operations will not change – i.e. securities continue to require an investment grade rating.

The ECB did not make any changes to their main monetary policy stance, maintaining the main refi rate at 0.15% and the deposit facility rate at -0.2%.

The ECB told us that it remains unanimous in the decision to implement additional measures without clarifying what those measure may be, but it is also clear from the focus of today’s meeting that they are willing to be patient and see the effects of the recent measures before taking any additional action.

As we have noted many times, we remain sceptical that the ECB will embark on a government bond QE program. Although nothing in today’s meeting was definitive on this topic, it is clear any decision about such a QE program is at least a couple of meetings away.

Overall we remain concerned about the pace of fiscal reform across the euro area. Despite the ECB’s constant call for continued efforts from individual governments, the collapse of financing costs has removed all sense of urgency toward the reform process.

The protracted era of very loose monetary policy pursued by the major central banks has led to large imbalances and crowding in certain sectors. We have seen an increase in volatility recently and see the potential for further volatility as well as liquidity issues to arise once markets begin to focus on these issues, particularly when the US Federal Reserve and Bank of England commence monetary policy normalisation.

In such an environment of raised volatility we believe that maintaining a focus on fundamentals through the noise will be key, along with diversification and a strong focus on risk management.

We retain our long-standing preference for being overweight subordinated European bank debt. Both the new TLTROs and the ABS purchase programme should be positive for European banks, along with the ongoing develeraging and forthcoming asset quality review.

Regarding the UK, with the Scottish referendum now behind us and the union intact, we retain our long GBP and short gilt positions on the expectation that the Bank of England may commence interest rate normalisation in the not too distant future – and perhaps as early as November but most likely by February.

Finally, we continue to like local currency bonds in selective emerging market economies, including India and Brazil. We believe that inflation has peaked and domestic demand is now weak enough for these central banks to stop raising rates.

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