Super Mario decided not to follow the Bank of Japan’s route of tiering negative interest rates, and instead opted to effectively subsidise the banks to lend via the new—wait for it—TLTRO II (targeted longer-term refinancing operations), which will be launched in June this year.
This time round the banks will be able to borrow at rates as low as the deposit facility rate, i.e. negative, compared to the previous TLTROs which were at the refi rate. Banks on the continent will have breathed a collective sigh of relief and, if the narrative is to be believed, we can expect more ‘non-conventional’ methods (not sure what conventional is these days) rather than taking rates any lower going forward.
The increase of the asset purchase programme was also bigger than expected. Periphery sovereign bonds got a boost as the ECB can now buy more of their outstanding debt and the inclusion of non-bank investment grade bonds was a positive for risk assets. As the chaps at PIMCO noted, by adding corporate bonds to its list of government, agency and covered bonds, as well as asset-backed securities, the ECB is now firmly in the realm of credit easing.
How big will the final corporate credit card bill be? And now that corporate bonds are fair game, does that mean that non-conventional could extend as far as blue-chip equities if necessary? The mind boggles.
Corporate bond spreads vs sovereigns have tightened again, which of course makes them more expensive and it does help marginally with liquidity, but I’m far from convinced that in a serious crunch liquidity wouldn’t dry up completely, ECB or no ECB. It just extends the bond buying cycle before the inevitable reversal and reinforces the need for careful credit analysis in the meantime.
So short-term, bond funds with decent exposure to Europe should benefit. Elite Rated Fidelity Strategic Bond, Invesco Perpetual Corporate Bond, Invesco Perpetual Monthly Income Plus, Jupiter Strategic Bond, M&G Corporate Bond, M&G Optimal Income and M&G Strategic Corporate Bond are all examples, with more than 15% allocation.
On the other side of the pond, the Fed is holding its own meeting, and the odds on a rate rise this year are increasing again. Any rise is unlikely at this meeting, but the rhetoric and MSM follow up need to be positive for continued market upside.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive’s views are his own and do not constitute financial advice.
