BlueBay AM: Green shoots, green bonds and International Women's Day'
BlueBay AM: Green shoots, green bonds and International Women's Day'
By Mark Dowding, co-Head of Developed Markets
Expectations for a dovish ECB meeting saw Bund yields rally and European sovereign spreads tighten during the past week. We see the announced extension of TLTRO until 2023 is seen as supportive for European bank credit and assets in the periphery and this should help sentiment at a time when investors have been worrying about downside risks.
Pushing forward-guidance on interest rate hikes out to 2020 underlines a desire by the ECB to remain accommodative as far as they can realistically project. In this case, it strikes us that the market is wrong to initially react to the ECB by focusing just on downward growth revisions, which were more a function of the ECB playing catch up with reality.
Indeed, it may be ironic that these moves occur just at the time when economic data in the region is starting to stabilise. This week’s PMI data across the region all showed a bounce from the month before and there is a sense that some of the worst of the data from H2 2018 may now be behind us.
In the US, data remains robust with the ISM services survey heading back close to its highs and the ADP labour market report continuing to highlight strength in the labour market. Nevertheless, Treasury yields edged lower as the equity market retraced some of its recent gains.
Corporate bond spreads showed signs of some retracement from their recent strength, as heavy March supply weighed on secondary markets.
USD limits EM
Elsewhere, sentiment in emerging markets (EM) also turned a little more negative, with Argentine assets under pressure ahead of regional elections at the weekend.
A slightly stronger trade-weighted US dollar has also limited the performance of EM local markets over the past few weeks.
Although Trump would continue to want to talk the currency lower, it seems difficult to engineer any material dollar weakness at a time when the US economy continues to outperform and evidence builds of the US winning concessions in the trade war it has been engaged upon, turning trade terms in its favour.
Greece: short-term underperformance, long-term promise
In Europe, Greek government bonds underperformed during the week following the announcement of a new 10-year deal.
In many respects, Greece did not need to come to market with this deal, having recently issued a five-year transaction, and given the fact that it is already fully funded for the next several years.
However, this was more of a vanity exercise on the part of the government, wanting to demonstrate the ongoing rehabilitation of the sovereign to Greek voters.
It seems likely that Syriza will lose power to New Democracy later this year and they have been keen to demonstrate their track record for prudent economic management, which has seen Greek yields fall to a 10-year low.
We continue to see Greece as an improving credit and the two-notch upgrade from Moody’s at the end of last week will probably be followed by further positive ratings developments in the year ahead.
Over time, these should pull in new buyers of Greek government bonds, as we have witnessed in sovereigns such as Cyprus and Portugal.
In turn, this could drive spreads substantially tighter over time, as long as Greece continues to pursue an orthodox policy mix.
In this context, the weakness seen in Greek government bonds this week should be short lived