For Financial Professionals

Global Bond Bullets

Comments from the Global Unconstrained Bond team
19/jan/2017 / By Marilyn Watson

Comments on today’s ECB meeting and global fixed income themes from the Global Unconstrained Bond team.

  • Politics, uncertainty and rhetoric have influenced bond and currency markets thus far in 2017. For example, President-Elect Donald Trump’s press conference last week, his comments this week on the US dollar and UK Prime Minister Theresa May’s first speech outlining her stance on Brexit, all triggered market fluctuations.
  • With elections in France, Germany and the Netherlands, the new US administration and Brexit negotiations, as well as a range of other risk events this year, uncertainty is something that we expect to continue for some time. Given the proliferation of headlines that we expect to see in coming months on the UK and the US in particular, this note will focus on our views in other areas of the world.
  • As expected, the ECB left key interest rates and its monetary policy stance unchanged today. President Draghi’s press conference was relatively uneventful, although he noted that there is no convincing upward trend in underlying inflation, despite improving data. This follows the Governing Council’s significant decision in December to extend its asset purchase programme beyond March 2017 until the end of the year, at a reduced rate of €60bn per month in the extended period (from €80bn).
  • We currently have a range of diversified positions in Europe but the overall theme is primarily one of short duration. Within the eurozone, we are positioned for a steeper German Bund curve and are short or underweight French government bonds versus Bunds. In contrast, we are neutral in peripheral European sovereign bonds apart from an allocation to Italian inflation linked bonds.
  • Elsewhere in continental Europe, we are short Swedish, Polish, Czech and Hungarian rates. We are also long the Swedish krona on valuations and our view that the Riksbank may pare back its loose monetary policy stance. The central bank extended its QE programme in December, at a slower pace, but there was some disagreement between board members on the effectiveness and necessity for further asset purchases. We also have a favourable view of the Russian ruble.
  • Interestingly, in the corporate bond market there has been a relatively heavy supply of new issuance by both European and US issuers. However, European non-financial corporate issuers have placed more than expected in USD-denominated rather than EUR debt and most new deals in euros have been pricing with minimal new issue premium, leading to relatively lacklustre performance. As a result, we have been highly selective in our participation. Fortunately, animal spirits are alive and well in the European corporate sector and, as such, a number of interesting opportunities related to M&A financing are expected in the coming months.
  • In Asia, we believe that dispersion in monetary policy stances is creating some compelling opportunities. We are positioned for a steeper JGB yield curve in the long-end and favour Indian and Korean bonds.
  • Meanwhile, in Latin America, we retain our long positions in Brazil and Argentina. Last week the Brazilian central bank cut rates by another 0.75%, taking the Selic rate down to 13%.
Marilyn Watson
Director, is Head of Global Fundamental Fixed Income Strategy

This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Sources: Bloomberg unless otherwise specified.

Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

The opinions expressed in this paper may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents.

This paper may contain "forward-looking" information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2016 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.