BOND INVESTORS are preparing for another wave of quantitative easing (EQ) by the European Central Bank (ECB), returning to some of their favorite post-crisis trades.
First: buy the debt of countries like France, which have greater margin for purchases by the ECB. Then bet on a fall in longer-dated yields relative to short-term rates. Then choose the highest return titles in the region, such as Spain.
Some of the ECB QE preferred restarts are already running
Although fund managers are not expecting any immediate move from the ECB, many are considering measures to boost the region's economy this year. Global trade conflict and low inflation expectations have turned the money markets into price cuts by 2020. As the ECB has maintained negative deposit rates, policymakers may be more inclined to visit the EQ first.
"I would expect additional cuts in fees, QE, an additional extension of future guidance," said Russell Silberston, fund manager at Investec Asset Management, which oversees $ 133.7 billion. "At the broader level, we like something that benefits less for longer, so yield curve levelers, for example."
ECB President Mario Draghi said at the bank's last policy meeting that there is "considerable room for QE." Other authorities have since reinforced the message. Bank of Finland President Olli Rehn, a candidate to replace Draghi this year, tweeted that the ECB "needs to do whatever it takes, as needed."
In the last round of QE after the financial crisis, the ECB wavered with € 2.6 trillion debt from 2015 until the end of 2018. This isolated the markets from risk and led to winning bets for the purchase of German funds, Italians, who were among the biggest beneficiaries of the program, saw incomes fall to record lows.
The debt of nations with longer term bonds that the ECB can still buy – like France – is now surpassing its last high. This is because, with the ECB only receiving securities that yield more than their deposit rate of minus 0.4%, they have become more scarce. It is also pushing the long-standing yields down faster.
The flattening of the interest curves "has a lot more to go through," as the resumption of the EQ was not accounted for in the markets before the last ECB meeting, according to Jamie Searle of Citigroup in a note entitled "Levelers, Levelers and Levelers" . He is in favor of negotiations aiming at a fall in Spain's 30-year yield on the 10-year bonds.
Investors have accumulated bonds since then, raising yields across the continent to new records and narrowing premiums on Germany. Danske Bank A / S likes betting on such spreads to increase further as it sees increasing pressure on the ECB, while Rabobank's director of tariff strategy Richard McGuire recommends that traders buy 30-year Belgian bonds against Germany.
Others favor Italy, which has many debts for the ECB to absorb. Although Italian bonuses were hampered by political risk last year, they "would be the clearest in Europe" if the EQ were to restart, according to Giles Gale of the NatWest Market. He recommends a five-year Italian debt against Germany.
The resumption of the EQ is far from definitive, as the ECB may need more signs of economic slowdown in the second half of the year to take action. Any easing of trade tensions could hurt business placed too early, while a rebound in inflationary expectations could also contain market speculation.
"Macro photography is still not bad enough to stimulate more flexibilization, but there has clearly been a shift in focus from negative risks to growth and Draghi is preparing the market for more stimulus if things get worse," said Joubeen Hurren, a specialist in cash. manager of Aviva Investors. "Curves can still flatten."
The resumption of the purchase of securities would also not be free of obstacles. Currently, the ECB is only allowed to buy 33% of the total stock of securities in a particular country and is already at that level in Germany and close to the Netherlands, according to Citigroup Inc. In comparison, the bank estimates that it has France and Italy in around 20%.
This issue of scarcity is leading some investors to buy barriers versus interest rate swaps, which the ECB probably would not buy. This trade could also serve as a hedge against turbulence, such as an outbreak of Italian political risk, with bonuses coming off a flight to safety. Sphia Salim of Bank of America Merrill Lynch prefers to buy 30-year German bonds against interest rate swaps.
"We like to have bonds with shorter maturities in Germany and also in European swaps," said Grant Peterkin, senior executive director of Manulife's Absolute Return Rates Fund. "We still feel there is value in a world where inflation expectations continue to be mitigated and some form of stimulus will be needed to reflect the global economy." Bloomberg