McDermott said Draghi’s move “is the latest phase of the greatest financial experiment of all time,” namely the worldwide quantitative easing efforts.
A harsh critic of bonds over the past 3-4 years, McDermott said he held out hope that Draghi’s choice to dive into the corporate bond market might have a better chance of stimulating the European economy than the sharply criticised adoption of negative interest rates.
“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,” he said. “The European economy is arguably stronger today than it was a couple of months ago and, if company management confidence increases, as is the hope, they should increase spending and so begins a more virtuous and self-sustaining cycle.”
Draghi’s attempt to prolong the bond cycle “doesn’t mean the inevitable reversal is no longer a concern,” cautioned McDermott. Rather, it “reinforces the need for careful credit analysis by bond fund managers in the meantime.”
“Bond asset classes have done pretty well this year and have been generally tumbling along. Though Mario is supporting the market cycle to help it carry on, at some point in the future, interest rates will go up.”
