Fixed income fund manager Tom Sartain examines what investors can expect from euro government bond markets after the ECB begins its expanded QE programme.
19.02.2015 | 15:12 Uhr
In January, the European Central Bank (ECB) announced a bold expansion of its asset purchase programme. Now that markets have had time to digest the news, investors want to know where eurozone government bonds will go next and where the opportunities lie in today’s low yield environment.
In summary, our views are that:
There remain many unanswered questions regarding the practicalities of the expanded asset purchases. Exactly how the purchases will be undertaken is not yet fully understood; it could be via reverse auction or directly in the secondary market. The split of the bonds to be bought in terms of maturity is also not clear. Finally, there is little detail on how the ECB will avoid causing dislocations in the yield curve. Some bonds will be easier to buy than others, and market participants are likely to try to capitalise on the ECB’s buying activity. This could lead to some significant distortions.
When the small print is digested, we think 2015 will present a number of opportunities for active managers. Long dated bonds in non-core economies, inflation linked euro bonds, agencies and covered bonds are all on our radar as potential major beneficiaries from the presence of a large buyer in the market.
Against a backdrop of very low or even negative yields on many eurozone bonds, Italian and Spanish yields offer a positive yield and a steep curve. This is attractive when combined with a central bank which has committed to significant asset purchases in these markets. We expect yield spreads – the differential between a bond’s yield relative to Bunds - will continue to converge between eurozone countries, but will stay wider than the levels experienced in the years leading up to the financial crisis.
In the medium term, yields are likely to move higher, but will remain lower than historical standards. European yields will stay lower than those of faster growing economies such as the US, but if the market begins to demand higher yields from US Treasuries, because the Fed Funds rate is moving higher, then investors in European assets will demand the same.
The principal systemic risk from a euro perspective comes from Greece and its possible ‘Grexit’. The market remains nervous of the situation in Greece, and should events unfold in a disorderly fashion, any expanded asset purchases will not be enough to prevent investors seeking a meaningfully higher risk premium on euro area assets.
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