Bullet from the Global Fundamental Fixed Income
Team 10 January 2013
Comments on today’s European Central Bank
(ECB) meeting and global themes from Scott Thiel,
Deputy Chief Investment Officer of
Fundamental Fixed Income and head of the
Global Fundamental Fixed Income Team.
The Governing Council of the ECB has yet again
voted to maintain the benchmark interest rate at 0.75%
and kept the deposit and marginal lending rates at 0%
and 1.50%, respectively. Following today’s
press conference we reiterate our view that
the ECB rate cutting cycle is over.
Although clearly citing downside risks to economic
activity, ECB President Mario Draghi noted signs of
improvement in both economic fundamentals and financial
markets. His remarks focused in particular on markets,
specifically referencing lower peripheral bond yields
and credit default swap (CDS) levels, higher
stock market indices and lower implied
volatility in financial markets. While a
strong upswing in economic activity may still
be some way off, the need for further monetary
easing appears to be waning.
In addition, we also believe it is unlikely that
the Outright Monetary Transactions (OMT) programme will
be deployed over the next several months, with an
increased chance that it may never actually go into
operation. Draghi noted significant improvements in
fragmentation and segmentation – two important
catalysts in the creation of the OMT programme.
Interestingly, the word ‘Spain’ was not
mentioned until more than half an hour had passed in
the press conference, while he did not
mention the word ‘Italy’ at all. To us, this
demonstrates that these themes are becoming
less idiosyncratic and more structural
across the eurozone
The press conference supports a new theme that we
have recently been developing in our global bond
portfolios, where appropriate - that of being
underweight so-called ‘risk-free’ interest
rates (US treasuries, German bunds, UK gilts
and Japanese government bonds). We believe
that, over the past few months, much of the
uncertainty in the capital markets has been removed.
In particular, four events have the potential to
prompt global investors to move out of risk-free
assets into either riskier assets or into
their own businesses:
I. Chinese economic growth did not collapse but
rather slowed in 2012 – removing the fear of a
dramatic slowdown in global economic activity.
II. The ECB’s long-term repo operations
(LTRO’S) and their announcement of the Outright
Monetary Transactions (OMT) programme helped to
dramatically reduce the tension in the peripheral markets.
III. The outcome of the US Presidential election
was decisive – removing some political risk from
the world’s largest market.
IV. The US fiscal cliff has been averted – at
least for the moment.
Yet, despite this reduction in uncertainty,
risk-free rates have not materially cheapened. We are
not saying that the world’s major central
banks will start raising interest rates in the
near term – we do not believe that to be
likely – but we do believe the significant
risk premium evident in risk-free rates is no
longer justified by the fundamentals. In our
view this is a significant opportunity and, as a
consequence, we will look to reduce duration in our portfolios.
In emerging markets, which have continued to
tighten, we are increasingly focussing on idiosyncratic
views and opportunities. Two of our favourite positions
at the moment are South African local debt and Indian
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