1. Newsroom
  2. Central banks deliver for now
Menu
Insight 30.09.2019

Central banks deliver for now

Central banks deliver for now

Government bond yields have rallied significantly this year in anticipation of monetary easing from major central banks, including the ECB and Fed who both delivered this past month.


Crucially, the ECB’s forward guidance is now open-ended and state-contingent, as they plan to keep rates at present or lower levels until inflation robustly converges towards the target, with QE similarly to continue until shortly before the first rate increase. With a lack of inflationary pressures within the region as well as globally, any hawkish shift is therefore unlikely in the near term. We therefore see asset purchases continuing for the foreseeable future, which should provide a backstop for core government yields as well as peripheral spreads, keeping them supported.

If anything, risks still appear to be to the downside for growth globally given the uncertainty that the US–China trade war has resulted in. We thus also think that US government bonds can hold onto gains, especially given the current market pricing where investors are anticipating an easing cycle that is closer to Powell’s “mid-cycle adjustment”, with two rate cuts priced in over the next year. If we do see further growth weakness materialise or geopolitical uncertainties rise, then this may force the Fed to cut interest rates more than anticipated, which makes longs at the front-end of the US rates curve an attractive proposition right now.

For credit markets, we see much of the monetary stimulus described as largely priced into valuations, whilst uncertainty surrounding trade, Brexit and global growth still weighs on the outlook and leaves us cautious in our exposure. Although the ECB did deliver with QE, it was clear to see that the Governing Council was looking to pass on the baton of future stimulus to fiscal authorities, given the lack of unanimity on the QE decision. Similarly at the Fed, the latest dot plot highlighted a split board with regard to the need for further rate cuts this year. Therefore we find it hard to rely on more monetary stimulus to fuel further spread-tightening, given that central bankers may become more reactive than proactive in light of these differing opinions between board members. Bearing this in mind, we will be focussing on the global growth data, looking out for signs of stabilisation in the manufacturing sector, as well the upcoming US–China trade talks, as markets hope for a breakthrough in negotiations.

Global & Absolute Return Fixed Income

Kazmi-Mohammed-150x150px.jpg

Mohammed Kazmi
Portfolio Manager, Macro Strategist

Expertise

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Most read

Insight 19.02.2020

Changes in consumption patterns

Despite being fast-moving and quite unpredictable, changes in consumption patterns are expected to reshape the economic landscape.

Insight 15.04.2020

The Case For Frontier Debt

Fixed-income frontier markets have seen significant growth in both importance and liquidity over the past decade. While still mainly thought of as part of global EM investments, frontier markets have “grown up” and deserve to be considered separately.

Insight 24.01.2020

Gaming - Game on!

Now more than ever, video gaming is at the heart of the entertainment industry.

Further reading

Insight 13.07.2020

Swiss Equities – Structural value creation

The resilience of the Swiss economy has once again been proved during the COVID-19 pandemic and is reflected by the Swiss equity market’s year-to-date outperformance.

Insight 06.07.2020

US Presidential Election Comes Into Focus

Spotlight - US President Trump’s re-election polls have fallen to their lowest levels since polling began for the 2020 Presidential contest raising the potential for a change in the presidency in 2021.

Insight 03.07.2020

COVID-19: UBP keeps you up to date

Since this coronavirus appeared, UBP has provided its clients with guidance and support as we all tackle this unprecedented global health crisis. We give you regular updates on everything from our own safety protocols and the recommendations issued by the authorities to our experts’ latest analysis on the effects of the pandemic on the world economy and financial markets.