EMU bonds are on track to have their worst run of performance in more than a decade, according to Henderson Global Investors’ chief economist.
Writing in the asset manager’s Money Moves Markets blog, Simon Ward points out that the EMU-12 7-10 year bond price index has dropped by 7.9% since early September. This highlights the extent to which bond prices have “taken the strain” of the eurozone debt crisis, he adds.
“Year to date, EMU bonds are down by 5.5%, representing – barring a late recovery – the worst annual performance since 1999, when 7-10 year Bunds plunged 9.6% as the newly-created [European Central Bank] ECB tightened policy at the tail-end of the technology boom,” Ward says.
The economist argues this adds weight to the argument for country-neutral quantitative easing (QE) across the eurozone, suggesting this should start with the ECB injecting about €120 billion (£103 billion) a month into the system.
Ward says this is unlikely to cause inflation to spiral out of control, as the ECB is already effectively conducting QE through its securities markets programme and covered bond purchases.
“More importantly, money-printing is necessary to head off deflation if the banking system is destroying deposits by accelerating deleveraging in response to sovereign bond losses and misguided regulatory pressure,” he concludes.
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