Signals from the European Central Bank (ECB) that monetary policy remains on an easing bias have boo...
Signals from the European Central Bank (ECB) that monetary policy remains on an easing bias have boosted sentiment in the global bond market.
Earlier this month, the ECB cut its key interest rate from 2.5% to 2% in a move widely expected by the markets. However, statements from ECB policymakers were the real focus of market attention.
'We weren't surprised by the cut itself, which was very much needed and quite expected,' says Steve Skinner, associate director of fixed interest at Hendersons.
'It was quite well received by the market, mainly because ECB president Wim Duisenberg held the green light out for more interest rate cuts. This saw interest rates fall further across the board, both in the European curve and the UK and US.'
The ECB accompanied the rate cut decision with a statement noting persistent downside risks to Euroland growth.
Duisenberg said the ECB has scaled down forecasts for European growth and inflation and said signs of an upturn in the economy are 'at best mixed'.
Market expectations of further interest rates were raised when Duisenberg said: 'We will monitor the situation and will act, if you want to hear the word, appropriately when the time is right'.
The Bank of England's Monetary Policy Committee (MPC), along with central banks in Australia and Canada, left interest rates on hold in June.
The MPC says it could not justify an easing of rates because of persistent inflation in the UK economy and some uncertainty on the economic outlook, while the Bank of Canada says its hand was stayed by a softening domestic economy and a steep fall in inflation. 'The Bank of England eased back in February and the UK economic data isn't indicating any downward pressure in terms of economic activity, so they are under less pressure to ease,' says Skinner.
'There is no immediate threat of deflation, as there is to a greater degree in Germany and the US, so the Bank of England can afford to wait.'
The US is also likely to leave rates on hold as it has already put an enormous amount of stimulus into the US economy not only by cutting interest rates but also via fiscal policy.
'It was appropriate for the Fed to sit back and see if it is having any effect,' Skinner says.
Nonetheless, the bond market will be supported by a continued easing bias on the part of Federal Reserve chairman Alan Greenspan.
'Greenspan's warnings with regard to deflation have helped keep rates on a steady tack going forward and he has pretty well underlined the market,' Skinner says. 'He wants rates to be kept low not only in the short end but also the long end of the curve, which will help revive corporate America.'
Demand from issuers buying back their own debt, along with consequent ratings upgrades from such restructuring, is also helping support bonds in general, he adds.
'We are running long duration versus our benchmark indices as we think there is still a lot of deleveraging that needs to be done following the excesses of the late 1990s, particularly in the US, and we believe the Fed is going to keep rates low,' Skinner says. 'While we don't believe the US will end up in deflation, the threat of it does provide long-term support for bonds.'
ECB cut interest rates in June.
Further rate cuts expected.
European inflation pressures easing.
UK and Australian rates on hold in June.
interest rates are already low.
Persistent inflation in the UK.
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