ECB January Meeting

The European Central Bank (ECB) announced a broader package of measures during its Monetary Policy Committee of January :

• ECB members unanimously voted to keep key ECB interest rates unchanged.
• Mr Draghi said there had been a "large majority" on the ECB's governing council in favour of triggering the bond buying programme now "so large that we did not need to take a vote" :
• The ECB will launch an asset purchase program that will include the existing programs of ABS (ABSPP) and covered bonds(CBPP3).
• The ECB will buy at a pace of EUR 60 billion per month from March 2015 to September 2016, equivalent to the amount of 1,080 billion EUR at least.
• Purchases of government bonds and agencies denominated, in EUR
• Maturity range for asset purchases between 2 to 30 years
• Purchases on the secondary market will be based on the distribution of each country to the ECB's capital
• The ECB retains oversight purchases but implements of the program will be decentralized way, with the assistance of national Central Banks.
• National Central Banks would buy bonds with negative yield
• Eligibility criteria will be extended to countries under an EU/IMF adjustment programme.

The ECB will buy until inflation moves towards ECB objective and purchases will underpin anchoring of inflation expectations.

• Modification in targeted long term refinancing operations conditions:

The ECB has changed the pricing of TLTRO by calling off the 10 basis points spread on refinance rate for TLTRO running from March 2015 and June 2016. This change will provide a cheaper funding in order to urge banks to lend to the non-financial private sector (mortgages and lending to the public sector are excluded).

• This package strengthens the decisions of September (purchases of ABS and Covered bonds issued by the Monetary Financial Institutions).

Clearly the motivation for today’s move is that the ECB is getting more and more concerned about the growth outlook and the decline in markets’ inflation expectations

Market impact

ECB measures on liquidity

• Negative deposit rate combined with assets purchased: most euro zone government bond yields are already at ultra-low levels while the euro has already dropped sharply against the dollar. Lower borrowing costs and a weaker currency could both help to boost growth in euro zone.
• Draghi’s will succeed in expanding the ECB’s balance sheet to the level seen in early 2012, or about 3 trillion euros.
• All these measures will maintain short term rate at a low level for a long period of time, and put pressure on our benchmark (Eonia).

ECB measures and credit impact

Bond markets reacted positively to the ECB announcements with a significant tightening in spreads as these unconventional measures highlight the ECB’s willingness to support a gradual macroeconomic recovery in Europe. As opposed to the TLTRO where ECB’s announcements were more focused on providing banks necessary funding, the ECB announcements target stimulus to the economy, hence:

• Corporates and consumers will have access to largest and cheaper lending

All these impacts have a positive trend on ratings overall and implying lower issue spreads.

Money Market Investment strategy

One thing is certain: monetary policy is and will remain accommodative for as long as necessary via additional interest rate cuts and/or the implementation of further unconventional measures. Our funds are oriented in this direction to outperform our benchmark in such market conditions:

• Favor positive yielding peripherals countries (Spain, Italy) vs. Europe’s core countries
• Overweight Credit and search for more yielding issuers (with a minimum short-term rating of A2/P2)
• Optimal duration allocation on longer maturities

The Fixed Income Team