Pioneer Investments’ Tanguy Le Saout sees generally positive reaction to Draghi

Tanguy Le Saout, head of European Fixed Income, says the manager’s European Investment Grade Fixed Income Team is overall pleased with the announcements from ECB president Mario Draghi.

Generally we are happy with what the ECB have announced today. The cut in the
marginal lending facility rates caps the Eonia rate and stops it from rising above
0.40%. Coupled with the suspension of the SMP sterilization this should push Eonia back towards the 0% level.

The TLTRO announcement should help second tier peripheral banks as they will be the ones most likely to use the facility, and so should benefit our long  subordinated bank position in credit. We have been short senior bank paper and may look to revisit this stance in light of the TLTRO announcement, given that banks may substitute debt with TLTRO funding, causing a further tightening of senior bank debt spreads.

The Euro has fallen by 0.5c but we remain to be convinced that this is any significant game-changer for the single currency. The Euro may weaken further in
the next few days but in our view, the key to any significant and long-term change in trend is only likely to occur when US short-term interest rates start to move higher. Thus, we are maintaining a relatively neutral position on the Euro at current levels.

The “pre-announcement” of an ABS purchase programme is welcome, but again is
quite small at €300bn and not yet a done deal – there is plenty of regulatory work
and hurdles to be overcome before implementation.

What is noticeable is that most of the measures announced are aimed at the front end of the yield curve – there is no outright absorption of long-dated duration as happened with the US and UK quantitative easing programmes. In that respect, longer-dated bonds yields may be somewhat disappointed and we could see some curve steepening in Euro area bond markets.

For those investors looking for full-blown quantitative easing (i.e. government bond purchases), they are likely to be disappointed. The bar has probably been raised even further by today’s news, and in our opinion only in the event of significant deterioration of economic activity would QE be enacted. Today’s measures make that significant deterioration unlikely in our view. Overall, we remain comfortable with our short interest rate duration position, believing that today’s announcements should highlight the lack of value in core bond market yields.


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