ECB rate cut could be opportunity for quality bonds

Investors should put cash to work in quality bonds, said one chief investment officer following the European Central Bank (ECB) rate cut yesterday.

Asset managers are digesting the ECB’s first rate cut in nearly five years, which saw interest rates fall by 25 bps, and attempting to predict what the ECB will do next.

Georgios Leontaris, CIO for Switzerland and Emea at HSBC Global Private Banking and Wealth, said the firm’s base case was for two more cuts – but data dependency and revised language from the ECB create risk for a more moderate pace.

“The start of the cutting cycle reinforces our view that a ceiling in yields has been reached, so any volatility can be seen as an opportunity for investors to put cash to work in quality bonds,” he said.

Mark Dowding, BlueBay CIO at RBC BlueBay Asset Management, said the direction of fiscal policy may weigh on the ECB’s decisions and that by the September ECB meeting, it should be more apparent what the new direction of travel in the new European Parliament should look like.

“For now, RBC BlueBay sees bunds as close to fair value levels and we struggle to have much conviction for the time being on Eurozone fixed income assets.”

Axel Botte, head of market strategy at Ostrum Asset Management, noted that the rate decision was not unanimous. Robert Holzmann from Austria dissented due to a recent uptick in inflation. The ECB has raised its inflation forecast to 2.2% on average for next year but kept it at 1.9% for 2026, noted Botte, adding that ECB president Christine Lagarde “struggled to justify a rate cut at a time when wage increases remain uncomfortably high”.

Azad Zangana, senior European economist & strategist at Schroders, said the rate cut, which spanned three main policy interest rates, was unanimously expected by economists and almost fully priced by financial markets.

“Attention now turns to the future pace of easing which remains uncertain. An above-consensus rise in May’s Harmonised Index of Consumer Prices (HICP) inflation rate to 2.6% year-on-year had raised questions as to whether the ECB would cut at all.”

Zangana also wrote: “Lagarde stated that while interest rates have been lowered, they remain restrictive, and will need to fall much further before they are considered to be neutral. This suggests that interest rates are likely to be lowered further over the rest of this year, even if inflation remains somewhat elevated.”

Risk bias falls to neutral in April as investors turn on bonds

Schroders’ forecast is more optimistic that a Reuters poll before the decision, which showed a consensus amongst economists for the ECB to cut rates by 25 bps twice more by the end of the year.

“By contrast, Schroders’ forecast is more optimistic, with three more cuts forecast this year, and two the next. This suggests some upside for both European fixed income markets (lower yields mean higher prices) and equity markets, which would be supported by higher economic growth, and lower discount rates.”

Investors foresee bonds and equities becoming more negatively correlated

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