Newton IM (BNY Mellon): Jon Day on the European Bond Market and Sterling

Newton IM (BNY Mellon): Jon Day on the European Bond Market and Sterling

March 18, 2020

Fixed Income
Obligaties (02)

Jon Day, fixed income portfolio manager at Newton Investment Management and manager of the BNY Mellon Global Dynamic Bond Fund comments on the European bond market:

“We are turning negative on government bonds, if economies are grinding to a standstill, cash needs are acute just to allow people, companies and suppliers can be paid.

The central banks have tried their best, slashing interest rates, but the price of money is not the problem, it’s the availability.  Government spending through things like tax cuts and benefit increases or loan guarantees is the only answer as this will supply the cash to allow businesses and individuals to keep going.

Quantitative easing (QE) helps, by financing some of the government spending, but it will still require a substantial issuance of bonds. This will put upward pressure on yields as we’re seeing this week, the ECB’s initial response to the crisis has also not helped.  They announced only a small increase in their QE programme and this together with very poor market liquidity has pushed all sovereigns wider versus Bunds.

In these unprecedented times, as has been mooted again today, a pan Eurozone bond where all members issue as one group could be on the cards. Although we would question if Germany would finally be willing to share its AAA credit quality.”

On today’s sterling moves, he added:

“Sterling is a financial currency and a deficit currency - when financial markets are under severe stress and foreign investors retrench, sterling tends to take the hit, as we have seen today and also saw this in 2008.”

Related posts