• Today, as expected, the ECB maintained the deposit rate at -0.4%, the main refinancing rate at zero and the marginal lending facility at 0.25%.
• Six weeks ago, the ECB announced that it will add non-bank investment grade corporate debt (the corporate sector purchase programme, CSPP), to the composition of QE. Subsequently, many market commentators anticipated further information about this today. While the details were released after the conference, President Draghi did note that non-banks, including insurance companies, with an eligible rating would be included up to an issue share limit of 70%.
• Among the details of the CSPP, purchases will commence in June in both the primary and secondary markets and eligibility will be based on the Eurosystem’s collateral framework for credit operations. The remaining maturities must be within a 0.5-30 year range and bonds will also be euro-denominated, issued by entities incorporated in the eurozone and have a minimum rating equivalent to BBB-.
• With the inclusion of corporate bonds out to 30 years, issuance may increase significantly in the long end, perhaps with tenders for shorter maturity debt. The long end of the corporate market has previously had limited pockets of natural demand but now, with ECB issue purchase limits up to 70%, the ability for issuers to get long-dated deals done has significantly improved. This may be the start of a much deeper 15-year plus corporate bond market in Europe.
• Negative rates have been hotly debated by fixed income market participants recently, not least with JGB yields negative out to 10-year maturities and Bunds negative to eight years. During the press conference President Draghi was asked about helicopter money, to which he responded that it was not discussed, and he noted that negative rates did not so far appear to have adversely impacted credit availability.
• In terms of our positioning in Europe, we retain a preference for peripheral sovereign bonds, including Portugal as well as a longer-dated relative value position in Italy versus Germany. We also continue to favour subordinated core European and select senior peripheral corporate bonds. We believe that the ECB’s supportive monetary policy stance will continue to provide a beneficial backdrop for these assets.
• In addition, we have a favourable view of certain longer-dated inflation-linked bonds both in Europe and the US. We believe that the meagre breakevens that have been priced in are low, particularly in light of central bank inflation targets.
• Regarding the US, in March the FOMC reduced its rate hike projections (the dots) down from four to two this year. In addition, Chair Yellen has increased rhetoric about the risks posed by global factors to US growth, particularly China, as well as delivering a clear message that she views the risks around monetary policy to be asymmetric and, as such, they have a preference for inflation to overshoot the Fed’s 2% target than for growth to falter. Nevertheless market pricing is, in our opinion, currently very benign with no Fed rate hikes fully priced in until 2017. All eyes will be on the FOMC’s decision next week on 27th April.
• We continue to view longer-dated treasuries, as well as securitised assets and some high yield debt, as offering attractive risk-adjusted sources of carry.
• Finally, emerging markets overall have performed positively year-to-date. We continue to see idiosyncratic opportunities in both rates and FX, including Mexico and India.
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