The doves fly again! Last week the European Central Bank (ECB) reported it will taper the amount of bonds it buys from 60 billion euros monthly to 30 billion euros, starting in January of 2018. Although this is a material reduction in monetary accommodation (30 billion is real money), the markets viewed the announcement as dovish, with the euro falling and European stock markets rallying.
So how is this dovish? Mario Draghi made it clear that while the 30 billion euro target will run until September of 2018, the program will not end quickly and can be extended and even increased if there is a need. The ECB also made it clear that interest rates will remain “at the present levels for an extended period of time, and well past the horizon of net
asset purchases.” As we have mentioned before, the ECB rates are below low. In fact, the ECB charges banks 40 basis points yearly to deposit money. This negative deposit rate is a real incentive to lend and to stimulate the economy, so goes the ECB’s argument. All this accommodation is part of the ECB’s plan to drive the inflation rate to just below 2.0%. Pushing inflation to the target level has proven difficult, and has required a dovish stance for longer than most anticipated.
Dovish central bank policy is generally positive for fixed income assets like corporate and municipal bonds, and also positive for economic growth. And as we look around the world, most bankers are dovish. The U.S. is still accommodative, as evidenced by the low Fed funds rate and the Fed’s large balance sheet. However, the U.S. is further along in its economic recovery, so it makes sense the Federal Reserve is less accommodative than the ECB. Japan shows no sign of reducing its highly accommodative stance, as it continues to struggling with low inflation and growth. The doves will be flying in Japan for some time.
From our perspective, the doves around the world will fly for a while longer, as central bankers are in no hurry to take away accommodation. In fact, we believe central bankers would be quick to offer further stimulus in the event of an economic hiccup. However, if we do see a sharp rise in inflation, the hawks would have a stronger position, though this is not our core forecast at the present time. So with doves still in the skies, decent economic growth and low inflation, these remain as good times for fixed income investors.
Source: The Financial Times, Bloomberg, CreditSights, BCA Research, the ECB