Pimco is tipping emerging market sovereigns as a potential beneficiary of any European Central Bank-led quantitative easing (QE), as markets eagerly await the ECB meeting later today.
While Pimco Global Advantage manager Andrew Balls says there is around a 50% chance that the ECB will introduce QE in the form of European government bond purchases over the next six months, he expects one of the biggest consequences to be a reallocation out of Europe into international markets.
‘If the ECB does QE, it depends how they do it: whether they buy credit or government bonds,’ Balls said.
‘If they do buy government bonds, by pushing down yields it would benefit global yields and one area would be emerging markets.’
He expects to see further compression in European bond spreads in anticipation of stimulus. As a result, he said investors that previously piled into European peripheral bonds for sovereign spreads will turn their attentions to unloved emerging market sovereigns instead. He added eurozone assets lower down the capital structure could also benefit from QE, particularly in the periphery.
Gary Kirk of TwentyFour Asset Management also expects European bank debt to benefit from the search for yield and potentially greater risk appetite.
Downward pressure on bond yields
Capital Economics believes an extended period of ultra-loose monetary policy in the eurozone could put some downward pressure on bond yields in the US and the UK, but does not view it as a decisive factor. The consultancy said it certainly will not prevent yields rising in the US this year and next.
‘We continue to expect 10-year Treasury yields to rise to 3% by the end of this year and to 3.5% by end-2015 as the Fed starts to return US monetary policy to more normal settings,’ chief economist Julian Jessop noted.
What about gilts? While Balls anticipates they could stand to benefit, he said by the time the ECB moved to implement full QE, the Bank of England (BoE) could well have started to raise rates.
‘It seems likely the BoE could start a rate rise cycle ahead of the Fed and ECB,’ he added.