Money managers are preparing for possible portfolio changes if the European Central Bank's monetary policy shifts — as murmurs suggest it might — in coming months.
Amid market murmurs that the European Central Bank will move to alter the course of its monetary policy in the next few months, money managers are preparing for a number of scenarios.
In anticipation of the extension of quantitative easing beyond March 2017 at the bank's December meeting, institutional investors are convinced that rather than a conventional exit, tapering will take a different shape.
In response to yields being elevated by the taper prospect, money managers continue to try short duration or trading rates strategies, while others are moving into emerging markets from developed ones. Once the yields go up, many believe there will be an opportunity to adjust the duration of fixed-income portfolios.
“We don't prepare for a tapering event, but for markets anticipating one. So an active duration management and yield-curve positioning is well needed these days,” said Beatrice Rosenthal, senior economist at BayernInvest based in Munich.
Although the ECB did not officially extend quantitative easing at its October meeting, investors agree the perception of QE has changed. The degree of uncertainty surrounding the stimulus is now about how the taper will occur, and not only its timeline.
“The genie is out of the bottle,” said David Riley, head of credit at BlueBay Asset Management LLP, based in London.
Previously the most commonly anticipated scenario was the extension of QE beyond March. Now the possibility of an earlier exit — still vividly resonating with fixed-income managers — could also benefit a number of strategies.
One indicator of the tapering time nearing is the scarcity of eligible bonds for the ECB to purchase, which impinges on quantitative easing. The ECB is already temporarily tweaking its capital key and has stopped buying bonds yielding below the deposit rate of -0.4%.
“A substantial proportion of global bonds is trading with a negative yield, especially German bunds, so the ECB's self-imposed restriction of not buying bonds that yield below the deposit rate creates a huge scarcity of assets,” said Shweta Singh, senior global economist at Lombard Street Research in London.
Pension fund executives contacted for this article declined comment on the possibility. One U.K.-based executive said in an e-mail: “ECB said explicitly at the last meeting that tapering was not on the table.”