‘Cash becomes more valuable with negative interest rates’ says M&G’s Leaviss

Jim Leaviss, head of Retail Fixed Interest at M&G Investments, has given his views on the current fixed income environment during a session of the Morningstar Investment Conference in London on 10 May.

Leaviss pointed out some 650 interest rate cuts have been made by central banks around the world since the financial crisis of 2008.

If 2015 globally saw a stop in trims, central banks recently started to cut rates again, he said.

Bonds entering into negative territory was non thinkable a few years ago before it became inevitable, Leaviss argued.

He said one consequence of the negative interest rates is that cash has become more valuable as it cannot be impacted by the negative rate environment.

“Will cash continue to exist in a world of negative rates?” Leaviss asked, suggesting a possible move to electronic money and highlighting the decision of the European Central Bank to cease issuing €500 notes.

“But could you make a law to ban physical cash?” he added.

Leaviss said there was value on the corporate credit segement. He called a sweet spot the long dated USD BBB corporate bonds, arguing they are still cheap and have an historic low average default rate (0.4% between 1970 and 2015).

Regarding the European Central Bank’s decision to purchase corporate debt, Leaviss assessed it would give a huge boost to the non-bank corporate market. He said the reaction to the ECB’s QE has not been seen yet but he remains confident on Europe which “will come out of the mess”.

Commenting the eventuality of a Brexit, Leaviss said it would be extremely bad news for the UK’s growth. He recalled the Bank of England will have to raise its interest rate to 3.5% by end 2017 if Britain chooses to leave the EU.

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