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Investors shouldn’t expect significant trimming from the ECB today on quantitative easing (QE). Nascent signals of an economic upturn in the Eurozone won’t prompt the central bank to make a major structural change at this point. With any QE programme, policy makers have to be adaptive, so we can expect the ECB to do more fine tuning and policy evolution rather than anything revolutionary. |
says Nick Gartside, CIO Fixed Income at J.P. Morgan Asset Management
In terms of the direction for European yields from here, expect continued downward trajectory, considering the supply and demand imbalances created by ECB buying. In addition to core bond yields testing the zero bound, we can expect to see negative yield potentially even spreading to riskier assets. Considering European peripheral sovereign bonds, spreads could grind tighter and bring in yields by as much as 50 basis points, putting for example yield on Spanish and Italy debt at around 75 basis points by later this year.
Think of the flattening of the yield curve globally as a flood. Initially the spread of water is shallow and becomes deeper, which we’ve seen mirrored by increasingly negative yield levels. The creeping flatting of the yield curve is also evident an investors reach down in credit quality to grab for income.
Globally investors should bear in mind this is not the time to fight central banks. Powerful policies are forcing bond investors to sell bonds back to the central banks and redeploy those assets, and we cannot forget how much this supports risk assets.
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