Columbia Threadneedle Investments fixed income manager, Martin Harvey, is also of the view that expectations might be a bit high leading into tomorrow’s meeting and is fairly cautiously positioned. He believes the hurdle Draghi needs to clear in order to beat expectations is rather high, but says the firm is maintaining an overweight position in peripheral bonds, which should be well-supported “even in the event of a mild disappointment”.
He is however, less convinced about the impact from a broader perspective because it is difficult to see a large move in bond yields from current levels..
“It is interesting that the 10year bund yield is largely unmoved since the previous ECB press conference, as investors are reluctant to fall into the trap of buying duration at low yields and risking a sharp snapback akin to that seen in the second quarter,” he said.
Like Gartside, Harvey is looking to the currency market for the largest effect.
“The shift in focus back towards interest rate cuts implies that the ECB is looking towards the currency channel to boost inflation. The recent drop in the euro suggests that this will be effective, and Draghi will be keen to ensure that the good work is not undone,” he said.
It is also for this reason that Gartside is looking to own dollar assets. And, while he too likes peripheral sovereign bonds, it is in European corporate credit and high yield debt where much of the value is in his view.
“The oddity is that although the ECB is easing in order to address disinflationary concerns, it is doing so against a relatively strong economic backdrop, in which European PMI indices are at nearly 4.5 year highs. That means a strong underpinning fundamental picture for corporate credit to do well, with strengthened corporate balance sheets keeping default rates low,” he explains.
On the high yield front, he says, credit spreads are essentially pricing in a multiple of where default rates should be, creating an attractive level of cushion.”
