ECB and Fed’s moves to support risky assets by ‘hunt for yield’- Danske Bank

Research Team at Danske Bank, suggests that the global fixed income markets should benefit from the common dovish message from the central banks.

Key Quotes

“The Fed being more dovish than expected has supported the hunt for yield, which the ECB initiated with its upscale of the monthly QE purchases. Following the FOMC meeting, we have seen a rally in US Treasuries and a bullish steepening of the 2-10Y part of the curve as the money market curve flattened.

In the euro area, the curve should gradually flatten further, as investors go further out on the yield curve with the front end being anchored by the ECB’s forward guidance. Notably, the ECB is set to scale up its monthly QE purchases to EUR80bn from EUR60bn from April, whereas the purchases of non-financial corporate bonds will not be started before the end of Q2. This implies the ECB’s purchases of euro government bond will increase considerably in coming months. Together with the Fed’s dovish message this week, this supports further performance of periphery and semi-core bonds.

The actions of the Fed and the ECB also support equities. Particularly, emerging markets should outperform developed markets in this environment and in terms of sectors, parts of the cyclical space are likely to generally outperform defensives.”