January 12, 2018

ECB boosts rates and Euro.

Management comment

This week saw the global warming discernible in terms of economic growth transform into global warning among interest rates. Twice this week, central banks began winding-down their accommodating monetary policies through the tone of their comments and announcements.

Firstly, the Japanese central bank declared is aim to halt buying back debt securities within the longer-term segment of the yield curve. This move triggered a rally in the yen and possibly heralds the end of frozen bond yields in the Land of the Rising Sun. Next, the ECB commented on its interest rate forward guidance in the light of the irrefutable improvement underway in the economic climate. The euro also reacted by rallying against the dollar. The level of interest rates has been disconnected from the reality of the economic situation for some time and must now adjust.

US 2-year rates are now close to net equity yields among S&P 500 components, whereas in Europe the DJ Stoxx 600 index is yielding 3.4% while 2-year Bund yields remain negative. Ungenerous bond yields are inciting issuers to capitalise on this anomaly. For example, two major players in the energy sector have issued bonds at all-time lows. Engie set a world record for a hybrid perpetual note issue which was pitched at a yield of 1.5%.

The Italian power group Enel then issued a green bond maturing in 8 years paying a coupon of 1.23%. These remuneration levels are all the more surprising given that the net average dividend payout on the stocks in both companies is almost 5%.

The stage is therefore currently being set for 2018. If the pace of growth increases and inflation picks up, bond yields will have to increase.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in January 12th, 2018.

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This week saw the global warming discernible in terms of economic growth transform into global warning among interest rates. Twice this week, central banks began winding-down their accommodating monetary policies through the tone of their comments and announcements. Firstly, the Japanese central bank declared is aim to halt buying back debt...
2018-01-12