Following Christine Lagarde’s earlier ‘rookie error’, the newest ECB stimulus package did not come as a surprise for Ella Hoxha, manager of the Pictet Global Bond Fund. Are European bonds now out of the danger zone? ‘The worst should technically be behind us though we’re not out of this crisis yet. The recession hasn’t even begun.’
‘Lagarde made a great faux-pas by saying the ECB is not there to manage spreads. I could not believe my ears. It was a rookie’s error’, says Hoxha. ‘But we also knew this mistake would have to be rectified pretty soon.’ So Hoxha increased her holdings in Italian government bonds in response, as these were the assets hit hardest by Lagarde’s error. ‘We like to keep an allocation to cash to give us the opportunity to manoeuvre when opportunities like this arise.’
‘Blessing in disguise’
When the predicted ‘correction’ arrived in the form of the Pandemic Emergency Purchasing Programme (PEPP), spreads on Italian and Spanish govvies indeed narrowed just as fast as they had risen earlier. ‘In fact, I don’t think they would have announced such a large package if Lagarde had not made that mistake,’ Hoxha admits. ‘So in a twisted way it was the mistake causing this package, though of course it also needed the nod from Northern European leaders I think.’
So have ‘bonds with a spread’ now reached their low point? Hoxha is yet to be convinced. ‘The worst should technically be behind us though we’re not out of this crisis yet. The recession hasn’t even begun yet. But if we can contain this by June, the huge stimulus thrown in the economy should be enough to stabilise markets.’
Government bond markets, for one, seems to have calmed down. ‘It’s important countries like Italy can borrow at a viable rate. Governments need cheap funding now, so it will difficult for rates to sell off aggressively going forward. So we also like Bunds at the moment. Yields are not likely to rise from here, as we are at the start of a recession.’
‘Credit market liquidity is problematic’
The situation on the credit markets remains more volatile. The Pictet Global Bond Fund also invests globally in corporate bonds of varying quality. ‘Liquidity in credit markets is quite challenging, so we haven’t changed our exposure to credit recently. Pricing is very difficult in this environment.’
Hoxha’s fund is invested mainly in US credit and Chinese bonds. ‘We invest in real estate bonds in China, as this is a sector under policy support. And we expect US credit to profit from the Fed’s QE.’
Need for dollars
But we’re not yet out of the woods, as there are still a number of acute problems that hamper the functioning of credit markets. Such as a lack of access to dollars. ‘Corporations and banks have difficulty accessing dollars. That’s something we’re watching. The Fed has launched a commercial paper facility and opened swap lines so that could help increase dollar supply. We’ll keep watching this space.’