It is not surprising that the ECB did not cut rates further due to the unclear risk/ reward of having more negative rates.  However, the ECB has tasked committees to evaluate stimulus options, which is laying the groundwork for a December policy move if necessary.  Financial share prices have rallied from lows, but concerns over profitability and NPLs continue and will be watched by policy makers.  A key technical driver of credit markets this summer has been the corporate purchase program of the ECB and soon to be implemented by the BOE.  The ECB has just passed the EUR 1 trillion mark in sovereign bond purchases and the new Corporate Purchase Program has already reached close to EUR20 billion since the summer.  ECB corporate buying has driven average IG spreads to lows and corporates are issuing bonds at negative yields.  Ironically, all this liquidity from the ECB is not helping trading liquidity measured by the bid-ask spreads in euro credit and in euro HY.  Throughout this year, bid-ask spreads have continued to increase making transaction costs higher for investors.  We see better value in higher yielding spread product in the US and EM

– Regina Borromeo, Portfolio Manager, Legg Mason Brandywine


The European Central Bank Governing Council met today to discuss monetary policy. They decided not to alter policy, keeping key interest rates unchanged as well as making no change to the previously announced asset purchase programmes. They did announce that they have tasked their technical committees within the European Central Bank to analyse the functioning of the implementation of the QE policy. Financial markets were disappointed by the decision to keep policy unchanged as there had been some speculation within parts of the bond market that changes would be made . In particular that there would have to be a change made in the mix of assets to be bought under the various asset purchase schemes. This may well occur if the ECB decides to extend current policies further but for now that decision has now been pushed into the future. In the press conference , Mr Draghi, the ECB’s President, gave a robust defence of current policies saying that monetary policy has ‘never worked better’, and in particular commenting that low interest rates were not the source of all problems facing the banking sector. There remains a strong commitment to low interest rates for the foreseeable future.

– Sandra Holdsworth, Fixed Income Manager, Kames Capital