Long Euro duration

During its last meeting, the ECB turned more enthusiastic on the European economic prospects: the growth figures have been revised upwards respectively to 1.5% and 1.9% from 1% and 1.5% in 2015 and 2016. The inflation figures have also been revised: downwards for 2015 at 0% and upwards for 2016 at 1.5%. M. Draghi said the revisions reflect the favourable impact of lower oil prices, the weaker exchange rate of the euro and the impact of ECB monetary policy measures. Elsewhere, the Institution did not change its monetary policy in March. Yet, the March 9th, the ECB has started its sovereign bond purchases programme. In three days, it bought for almost EUR 10 bn of sovereign debts signalling to the markets that the ECB is able to reach its 60 bn target. That brought a powerful support to the sovereign debt markets with yields reaching new historical lows. Currently, the German yields are in negative territories up to 7 years. Duration-wise, we have a long stance implemented via Italy.

We keep playing the reflation card before year-end

The recent inflation data came out at -0.3% YoY (February Eurostat estimate) remaining anchored in negative territories; yet up from previous mark (-0.6%). As a result, our exposure to French and German inflation linked bonds initiated in January outperformed their nominal peers. We maintain this conviction given that the economic cycle is improving in the US and EMU and the ECB is buying linkers as well. The main risk factors are the downward pressures in oil prices and weakness in food inflation.

Searching the remaining yield pick-up

Once again, the ECB stance is a key driver of European sovereign debt performance. The ECB’s monthly purchases create flow distortions with a negative net supply in the euro land (Chart 2). We are therefore keeping our overweight on non-core sovereign debts (Italy, Spain and Ireland) whose countries should post budget primary surplus (except Spain) in 2015. The reversal risk comes from Greece with on-going and delayed negotiations to alleviate the debt burden and limited cash buffer.

Flattening strategy on the US curve

The Fed moved a step closer to its first rate hike since 2006. Yellen, its Chairwoman, removed “patient” from its language. As expected in our previous edition, the Fed has revised downwards its long-term economic outlook, especially the inflation figures, mostly driven by the fall in oil prices. As a result, the normalisation of the rate environment should be slower than expected, as expressed by decline in the Fed’s dot plots (interest rate path expected by each Fed’s governor; Chart 1). Thus, we are comfortable to keep a negative bias on the short-term segment. In addition, we maintain our flattening strategy (short 5Y / long 30Y) on the US Treasuries yield curve.