John Pattullo and Jenna Barnard, managers of the Henderson Strategic Bond fund, have increased the duration of the portfolio in recognition of impending quantitative easing by the European Central Bank.
As the Continent continues to stare down the barrel of ‘Japanese-style’ deflation there seems to be a growing acceptance in bond markets of QE in Europe later this year.
Inflation in the eurozone fell to 0.3 per cent in August, a five year-low and well below the ECB’s 2 per cent target. Indeed core and peripheral European debt markets leapt after ECB president Mario Draghi commented on the low inflation expectations at Jackson Hole last week.
Pattullo says: “Bond yields across Europe are rallying strongly on the bond market’s growing acceptance of full blown QE, possibly beginning later this year.
“Draghi and the ECB are facing a big deflation scare and know they have to do something to avoid the ‘Japanification’ of Europe.”
Meanwhile T.Rowe Price European fixed income manager Kenneth Orchard does not believe the ECB will consider QE measures until the recently announced targeted longer-term refinancing operation (TLTRO) action is complete in December and the asset-backed securities (ABS) purchase program is operationalised.
“Significant quantitative easing will probably be implemented at some point. Some ECB members still have ideological objections to buying government bonds, so QE is not a fait accompli,” he says.
“Nonetheless, the latest TLTRO easing package allows the more dovish ECB members to show the hawks that they have tried everything else so that they can start to contemplate QE.”