How global headlines impact bond markets: from Brexit to elections and negative interest rates
Jim Leaviss, manager of M&G Global Macro Bond and head of fixed interest at M&G talks to us...
Starting a new job can be both exciting and daunting. So spare a thought for Andrew Bailey, who became the Governor of the Bank of England on Monday – right in the midst of the global healthcare crisis.
One of his first tasks will be to work with the government to keep the economy going, when almost everyone is being told to stay at home. Not an easy task.
But his first words echoed those of the Chancellor who said the government would “do whatever it takes”. Declaring the Coronavirus outbreak “a financial emergency”, Bailey said: “We will do what it takes to meet the needs of the economy and the people of this country.’”
Before Bailey arrived at his new post, interest rates had already been cut from 0.75% to 0.25% by his predecessor the week before, and measures had been put in place to help banks lend to small and medium-sized businesses.
This was followed by Chancellor Rishi Sunak’s announcement of the largest sustained stimulus since Norman Lamont’s pre-election budget in 1992 (£350 billion).
Today, Bailey lowered interest rates again to just 0.1%.
As TwentyFour Asset Management’s Mark Holman pointed out: “The central bank is coordinating its actions with the UK Treasury, so that the measures in aggregate have the maximum impact to support the economy and to try to make sure economic deterioration is temporary.
“Importantly, in 2008 during the financial crisis, the banks were a core part of creating the problems that followed, but this time around they could become a core part of the solution, by continuing to lend to the economy through this difficult period. Over the last 10 years the banking system has been building up resilience to make sure that this is possible.
“Having said that, a global problem cannot be solved by one G7 nation alone. Coordinated action from around the globe is what is required.”
In the US, the Federal Reserve (Fed) has so far made two interest rate cuts. The first, according to AXA Investment Managers’ David Page, was a “surprise intermeeting cut – the first of its kind since 2008.”
Instead of waiting for the scheduled meeting to announce it, the US central bank took emergency measure. A $1trillion package to support the world’s biggest economy has also been discussed. The overall aid package would be larger than the US response to the 2008 financial crisis, amounting to nearly a quarter of what the US federal government spent last year.
In Europe, Christine Lagarde, also relatively new to the role of European Central Bank (ECB) President, has announced two packages in recent weeks.
Commenting on the first announcement, Fidelity International’s Anna Stupnytska, said:
“In a very smart move, the ECB chose not to cut rates. Rather they chose to focus on more targeted areas where help will be needed. The combination of a boost to the quantitative easing programme focused on private assets, and to effectively pay the banks to borrow from the ECB and lend to the private sector, is unambiguously a step in the right direction.
“However, given the extremely high uncertainty about the spread of the virus and its impact on the economy, it remains to be seen whether these policy measures will be sufficient to see the Euro area through the downturn over the next few months.”
She was right: today (19 March) a second package worth some €750bn was announced. T the ‘Pandemic Emergency Purchase Programme’ will focus on sovereign bonds and corporate debt.
Echoing the words of her predecessor, Mario Draghi, who promised to do “whatever it takes” during the Eurozone crisis in 2012, Lagarde said on Twitter: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”
There have also been major monetary policy initiatives from the Reserve Bank of Australia, Bank of Canada, the People’s Bank of China, Sweden’s Riksbank, the Norges Bank and the Bank of Japan amongst others.
Legal & General Investment Management’s, Tim Drayson, thinks these packages will only increase over the coming weeks, as the Coronavirus takes its toll on the world economy.
A number of fund managers have worked for the Bank of England: Niall Gallagher, who runs GAM Star Continental European Equity fund, M&G Global Macro Bond and M&G Episode Income managers Jim Leaviss and Steven Andrew and Richard Colwell, manager of Threadneedle UK Equity Income fund, to name a few.
Speaking to us before the crisis, Richard said: “I joined the Bank of England in 1990 in the monetary policy area and worked there for two years. Ironically, a year ahead of me, was Andrew Haldane, who is still there and the chief economist.
“Hopefully Andrew Bailey will be a good custodian. He’s very experienced, resilient and cool under pressure – and that’s what you want. You never know how good a new Governor is going to be until the next crisis. Because that’s when you need a really strong central bank.”
Over to you Andrew!