Kames: Germany cannot bail out Europe and keep AAA

UK-based Kames Capital’s fixed income team has said quantitative easing in Europe is a must in order to prevent Germany losing its AAA rating.

Managers Phil Milburn and David Roberts – who run the group’s Strategic Bond fund, among others – said QE in Europe was “absolutely essential”, with Germany unlikely to keep writing cheques to bail out the periphery because of the threat to its AAA rating.

Roberts said: “Believing that Germany will be able to bail out Europe and retain a AAA rating is naive.

“We are seeing QE through the back door with liquidity for the banks and although it is not solving the crisis in the short-term it is a move to a more sensible fiscal program.”

The duo also expect the UK to expand its own QE programme, predicting the Bank of England will announce an expansion to the £275bn QE program in the next four to five weeks.

The bond managers also delivered a warning to investors buying government debt, following the rush into safe havens which pushed prices up and yields down to record lows.

Roberts said out of 78 countries, two thirds have seen a rise in inflation over the past year despite the difficult economic conditions and pressure on the consumer, something which will hurt bond investors if it is maintained.

“Investors have been happy to ignore valuations and real returns to chase safe havens in the view it will get your capital back. But I think the positive numbers in the US have some legs, while global growth and inflation could well surprise on the upside this year.”

Milburn has the view governments are “rigging the markets” by forcing investors into safe havens so they can tax savers to reduce the government debt burden.

“This is why we have fairly low duration,” he said. “We are not zero duration yet but we are happy to go that way when the time comes.”

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