According to the head of fixed income economics at UBS, the global reflation that has been going on since the Fed began its quantitative easing programme continues. And, while the US and the UK have stopped their printing presses, the balance of easing remains on the side of loosening polic.
“The overall pool of easing is bigger,” McCullum said, which begs the question, “do you yet want to fight central banks.”
“Last year there was some hope that markets would return to more traditional drivers, but given the policy moves seen in the last two months, it looks as though investors are still going to have to follow central banks,” he added.
According to McCullum, the stock matters when it comes to quantitative easing, not just the flow, and given that the stock is not going away, there remains a lead weight on the fixed income markets.
“The purpose of QE is to push money into everything else. The question for Europe is, where is that money likely to go? The credit market in Europe is not deep enough, so increasingly, in Europe it might be the case that the next best alternative to a bund, is a gilt or a treasury bill,” he said.
As a result of this continued global reflation, McCullum argues, it still pays to take risk in credit markets and, he said, relative bond trades are likely to get a lot more attention.