Columbia Threadneedle Investments: in attesa della BCE

The market is looking for a rate cut and an expansion of QE, following recent aggressive rhetoric from Mario Draghi and his colleagues on the governing council. Investor confidence in the ECB to over-deliver is immeasurably higher with Draghi at the helm than his predecessor Trichet, and it seems that positioning has built up accordingly. To beat expectations, a 20bp rate cut and a large expansion of the QE programme would be required. Given the high hurdle, we are not minded to position for such outcomes. We do maintain an overweight position in peripheral bonds, which should we well-supported even in the event of a mild disappointment.

While this may be important for investors with specific interest in the bond and interest rate markets, from a big picture perspective it is difficult to see a large move in bond yields from such depressed levels already. It is interesting that the 10year Bund yield is largely unmoved since the previous ECB press conference, as investors are reluctant to fall into the trap of buying duration at low yields and risking a sharp snapback akin to that seen in the second quarter.

The shift in focus back towards interest rate cuts implies that the ECB is looking towards the currency channel to boost inflation. The recent drop in the Euro suggests that this will be effective, and Draghi will be keen to ensure that the good work is not undone. Rising interest rates in the US should offer a helping hand on this front going into year-end.