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| Scott Thiel, of BlackRock |
"As had been broadly expected by the market, the European Central Bank (ECB) kept the main refinancing rate unchanged at 0.5%, following last month’s 0.25% cut. Furthermore, the marginal lending rate and deposit facility remain at 1.0% and 0% respectively. "We disagreed with mid-May market pricing of the introduction of a negative deposit rate. The results of today’s meeting supports our view – the ECB is willing to see the impact of the recent rate cut and other policies and initiatives designed at addressing concerns over ‘fragmentation and segmentation’.
"May was a torrid month for fixed income markets, with volatility and yields rising across all sectors from ‘risk-free’ government bonds to investment grade, high yield and emerging markets. In this environment our portfolios outperformed their respective benchmarks based on our short duration positioning in the US and UK, long USD positions and minimal exposure to emerging markets.
"The interest rate selloff was primarily caused by a backup in risk-free rates after several FOMC members commented on the prospect of a reduction or ‘tapering’ of quantitative easing (QE), which is currently running at $85 billion of treasury and mortgage purchases per month.
"As such, tomorrow (Friday)’s US nonfarm payroll number will be very significant for markets as it will be important for the discussion about Fed monetary policy.
"Increased volatility is in part due to the potential inflection point in US monetary policy but is also the result of significant changes in Japanese monetary policy framework – especially the loss of independence of the Bank of Japan (BoJ) from the government under the agreements between Kuroda and Abe to affect government initiatives through monetary policy. Bond investors – including ourselves – place a great deal of value and stability in independent central bank framework.
"We remain short US duration and have a positive view of both the US economy and the dollar over the medium term. We view the new domestic energy supply as very supportive over the medium term, while household wealth is already improving as the housing market appears to be recovering and the stock market has risen (although the sequester is dampening some of the economic data).
"The JGB market has remained volatile for some time, following the BoJ’s announcement that it would significantly increase its loose monetary policy. In the real economy, meanwhile, recent data suggests economic growth. We remain underweight JGBs and have increased our short yen position.
"Emerging market bonds were some of the worst hit in recent weeks with the spreads for both hard and local currency sectors widening but with local EM fixed income markets being particularly hard hit. We had very little exposure to local EM bonds but have trimmed our external EM positions recently to reduce the levels of risk from this sector. Sustained accommodative US monetary policy has benefited these markets and the potential reduction in QE could reduce that liquidity and source of support. One interesting observation is that when Brazil eliminated its tax on inflows to local government bonds the impact on the Brazilian real was minimal. This suggests to us that currently investors are cautious about increasing their EM positions.
"Finally, today’s Bank of England Monetary Policy Committee (MPC) meeting was the final one with Governor Mervyn King at the helm. We retain our negative view of the UK given the political stalemate, continued above target inflation and anaemic growth and we therefore remain short sterling."