Scott Thiel, deputy Chief Investment Officer of Fundamental Fixed Income and head of the Global Fundamental Fixed Income Team at BalckRock, comments on today's ECB and MPC announcements.
Scott Thiel, deputy Chief Investment Officer of Fundamental Fixed Income and head of the Global Fundamental Fixed Income Team at BalckRock, comments on today’s ECB and MPC announcements.
In recent weeks events in Ukraine and weak US economic data have led to a risk-off tone overall in fixed income markets. In the emerging market space, while we are fully cognisant of some of the problems currently affecting this sector (besides recent events in Ukraine, the external imbalances that some EM countries have, the withdrawal of liquidity through US tapering and a slowdown in the growth rates of many emerging markets), we do see select investment opportunities.
As such, we like some front-end hard currency government bonds, such as Turkey and Indonesia, which we feel offer value and will not be impacted by the adjusting currency moves. In addition, we like the bonds of Indian banks. These have relatively low foreign ownership and we believe in the credibility of the Governor of the Reserve Bank of India to use monetary policy to tackle the country’s inflation problem.
We were impressed on the whole by new Chair of the US Federal Reserve, Janet Yellen, in her semi-annual Monetary Policy Report to the Congress in February. Overall we view it as risk asset positive in the sense that she seemed to be very deliberate, non-dogmatic and circumspect about the facts. That being said, we have closed our short US Treasury duration position given the current risk-off tone in global fixed income markets as well as recent weak US economic data (which has in no small part been weather related). All eyes will now be on tomorrow’s employment data for signs of economic growth.
We do, however, remain short UK gilts on the belief that the improving economic fundamentals may prompt the Bank of England (BoE) to be the first among the leading developed central banks to tighten monetary policy via an actual rise in interest rates. Nevertheless, we did reduce the size of the position in line with our thesis for closing the US short. The BoE kept interest rates and its Asset Purchase Programme unchanged today.
The ECB kept headline interest rates unchanged today. During the press conference that followed, President Draghi struck a pragmatic and balanced tone. According to the ECB’s revised inflation forecast, they do not see deflationary risks in the eurozone. Rather, they expect inflation to trough soon before slowly rising but staying low for a protracted period (1.5% in 2016). The ECB have also increased their growth rate forecast for 2014 to 1.2%. While acknowledging improved near-term developments, Europe has to focus on structural reforms within member states and fixing the banking system.
We retain our positive views of the European periphery countries and currently prefer to express this via Spain, Portugal and Slovenia. Portugal and Slovenia are now among our highest conviction views and although we have already seen significant spread compression, particularly in front end Portuguese government bonds, we expect a further decline in their respective spreads over Bund yields.