Swip Strategic Bond manager Luke Hickmore believes those awaiting monetary easing in the eurozone could find they are disappointed after the European Central Bank’s (ECB) 5 June meeting.
Almost two years after ECB central bank president Mario Draghi calmed markets by saying he would do ‘whatever it takes’ to save the euro, Hickmore fears Draghi could surprise the market on the downside after the upcoming central bank meeting.
Speaking ahead of a story in German newspaper Der Spiegel last Wednesday concerning leaked ECB documents about plans to implement a negative deposit rate, Hickmore said it was a scenario he envisaged playing out.
‘I think the market has got ahead of itself in terms of expectations over what the ECB will do. It has been pricing in quantitative easing (QE) and yields have been driven lower,’ he said. ‘We do not expect the ECB will need to do more QE. They may take the rate to negative and if that is the case, when the market is expecting purchases, we may see European yields go higher.’
Der Spiegel claims to have seen leaked documents that suggest the central bank will effectively charge a tariff of 0.1% on all funds deposited with the bank.
To prepare for this possibility, Hickmore has taken the duration of his European credit exposure down from one year to zero because he felt even having that level of interest rate sensitivity came with too much risk.
‘The UK and the US are doing well, while Europe has stagnated, and the yields don’t deserve to be where they are,’ he said.
Elsewhere, Hickmore has cut duration on gilts from 4.5 to 2.5 years, one of the lowest levels in the fund over the past four years. ‘There have been times in the past couple of years when it was worth taking risk but right now we would rather protect investors’ capital.’
The manager also has concerns over the high yield market, which he said was ‘at the very best fair value’, having performed well in the first part of 2014.
Co-managed by Roger Webb, the £125 million Swip Strategic Bond fund has returned 24% over the past three years, compared to a sector average of 21.8%.