what does ECB move mean for investors?

what does ECB move mean for investors?

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Bond managers have said the European Central Bank's move to cut rates and start buying asset-backed securities in Europe means it is now unlikely to implement a mainstream QE programme.

ECB president Mario Draghi said yesterday the central bank will begin a long-awaited asset purchase programme in the coming months, including residential mortgage-backed securities, as well as asset-backed securities and covered bonds.

We would avoid the sovereign bond market at this point. The money is to be made in ABS

Draghi also revealed a glimpse of the tensions behind the scenes, noting full blown QE was "discussed" among council members.

The main dissenter remains Germany, with its own central bank chief widely reported to have opposed the latest moves by the ECB.

Berenberg senior economist Christian Schulz said the announcement suggests QE plans are off the table: "Full-scale quantitative easing through major purchases of sovereign bonds remains a last resort, but looks less likely," he said.

"Draghi dropped any reference to fiscal stimulus, which he had mentioned in his Jackson Hole speech two weeks ago, it having triggered sharp criticism from Germany. If the ECB were to have to go further, it would need at least tacit support from Berlin."

Old Mutual Global Investors head of multi-manager John Ventre added: "We would avoid the sovereign bond market at this point. Traditionally, if you think of quantitative easing, sovereign bonds are what they would buy, but I think it is unlikely they will come in with a conventional QE programme.

"The money is to be made in ABS. Own the stuff the ECB is buying."

Other managers agree the ABS market will provide the best opportunities for investors to benefit from the shift in policy.

There was an immediate impact on the day of the announcement, with 3-year bonds climbing one percentage point above par, with many investors predicting a further rally when the details of the ABS buying programme are released.

TwentyFour Asset Management portfolio manager Ben Hayward said: "This is going to be extremely supportive of ABS spreads. If you think about the size of the central banks programme, this will be bigger than the covered bond programme, bigger than QE in the UK."

However, it may not be easy for investors to jump in to the market.

M&G Investments' bond manager Stefan Isaacs, whose European corporate bond fund has 12% in ABS, said: "What we are seeing is most of the offers in the market have been pulled, which essentially means anyone who owns any inventory wants to wait and see what happens in terms of the ECB buying programme. They expect to sell at a higher price than they would today."

Isaacs added investors need to be cautious if they do venture into the space, as some countries may use the ECB's announcement to offload non-performing debt.

"There is a danger you buy this space indiscriminately. There is still a need to understand what the underlying asset you are buying is. If you take economies like Spain and Italy, there is still a problem of non-performing loans," he said.

Indeed, while the ECB has said it will buy RMBS, which form nearly 60% of the €1.5trn European ABS market, it will only buy high-quality paper, such as senior tranches or guaranteed mezzanine tranches.