David Roberts

The definition of insanity or the ECB’s approach to QE?

David Roberts

Markets have once again been reassured by benign central bank policy. The European Central Bank has confirmed it will continue to provide free money, albeit at a reducing pace – not so much tightening as reduced easing. But it lacked the courage to refer to this as tapering or to discuss its plans to bring asset purchases back further.

We need to remember that extreme accommodative policies like quantitative easing and NIRP (negative interest rate policy) had never been tried in the real world prior to Japan two decades ago. But the ECB and other central banks have been all too eager to jump at the chance to deploy these measures since the global financial crisis, and they are utterly convinced of their success.

Why does the ECB continue with emergency rates, with the same, decade old policies, at a time fiscal response has been significant and surely the worst of the lockdown measures are behind us? Give us some confidence, let us believe you think the future might actually be OK. Encourage us to invest in ideas, discourage us from making the same safe, stock buyback, dividend pushing, core economy easy wins. Try something different!

If not, Europe can look forward to another decade of relative inefficiency. Pray there is no more crisis, for the central bank is still fighting the 2008 one!

Bond yields across the G7 remain incredibly low of course. Neither the Federal Reserve nor ECB seem in any rush to push them higher. Market bears have been all but beaten into submission. It seems the vast majority of policymakers are aligned in wanting to erode the real value of debt. This is classic financial repression, enabling governments to improve their debt metrics over time in a system rigged by central banks.

For bond investors, the free ride on beta is still over: while we do not expect exceptionally loose monetary policy to be brought to an end soon, there clearly isn’t room for it to get any looser.

Bond investors will therefore need to produce more alpha to generate positive real returns for investors.

Although there is little positive prospect of taking directional positions in core bond markets for the longer term, we are still finding sufficient alpha opportunities via curve positioning, cross-market trades and alike. We also think that high yield is one of the few areas of the bond market to offer inflation-beating income, so we are happy to have exposure to this area.

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Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

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Monday, September 13, 2021, 12:02 PM