Bond Update: Risk-on move fuelled by ECB expectations
Yesterday's forceful rally in equities and riskier bond classes was driven by three main events:
- As mentioned earlier, there has been a structural change in the non-core European bond market. We have witnessed fierce spread contraction in Spanish and Italian bonds lately, entering a positive correlation scheme towards the core safe haven basket, i.e. the market and investors downscale risk in these government bonds.
- With Bank of Japan's quantitative easing and the overall presence of extreme cash levels (also due to huge redemptions and coupons) money is flooding the street in the hunt for some yield pickup, which initially took investment grade corporate bonds to new low yield levels.
- The latest speculation is that the ECB will do more than the traditional measures to kickstart Eurozone economies, in the form of some kind of further stimulus, as seen from the Fed and the BoJ.
These combinations finally found their way to equities yesterday and pushed European corporate bond and non core bond markets up as well, despite weaker number on the European economy.
Lots of discussion taking place about the morality and sustainability of yet another cash-inflated rally, but as an investor, you will only have to scale the length and magnitude of such a rally, and time your exit wisely.
A hint: as stated a few times before, the combination of very low core (safe haven) yields and a powerful rally in high yield and equitites, seems unsustainable medium-term.