The size and duration of QE is currently the single most important driver of euro rates and government bond yields. More near-term easing is likely, but prolonging QE would not be justified if inflation picks up later this year as we expect. A failure of the ECB to meet the high market expectations for more easing in March can trigger a sharp correction in European high grade bonds….
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• With only moderate program adjustments, we think the ECB could carry out 15 more months of QE in its current form, if needed. Raising monthly purchase volumes is more likely than an extension, and would push yields and spreads down further, but would also enhance the risk of a correction later.
• Bunds will likely outperform most highly rated Eurozone government bonds – at best some will achieve small excess returns, but only a few basis points of widening can wipe these out. Portuguese bonds recently underperformed strongly due to political risk, and promise 5–8% of excess return if the new government agrees on a reasonable budget plan. Downside risk is also high, though – a possible exclusion from QE could cost 5–6% in underperformance.
• In a broader context, we confirm our preference for European corporate bonds over high grade bonds.
Fonte: BondWorld.it
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