The Daily Update - Draghi Stimulus

As we await any further news from ECB members regarding talk of potential stimulus action, officials may take note of the release of the ZEW indicator, a gauge of German investor confidence which yesterday fell by the most in 3 years. There is “increased uncertainty regarding the future development of the global economy,” said ZEW President Achim Wambach. “The intensification of the conflict between the USA and China, the increased risk of a military conflict in the Middle East and the higher probability of a no-deal Brexit are all casting a shade on the global economic outlook.”

Indeed, ECB President Draghi spoke in Portugal yesterday saying “additional stimulus will be required” if the economic outlook doesn’t improve, and hinted at further rate cuts and renewed asset purchases as viable options.

With all this talk of weakness and potentially lower rates, it is perhaps unsurprising that it now requires a bond with a minimum maturity of 2037 to achieve a positive yield in German government debt (actually, at a price of 170.17 the Bund 4% 2037 actually yields zero). At the aggregate index level, German government debt currently yields minus 11 basis points!

Interestingly, JP Morgan calculate that sub-zero government debt now makes up 25% of developed markets and 46% of the Eurozone which has doubled its composition of negative yield stock from the lows of 22.5% in October 2018. In total, some $11 trillion of global debt now has negative yields, a level not seen since October 2016.

So to regular readers, it will come as no surprise that we invest in “wealthy” countries whose bonds come with extra cushion, and don’t trade “expensively”. Whilst we have absolutely no problem with Germany as a top tier credit, our portfolios yield around 4% in USD. Of course, adjusting for FX hedging this brings the Euro equivalent yield down by just over 2 ½%, but that’s still very attractive in our opinion; especially when ten-year Portugal now yields 0.6%, Greece is only 2.5%, Spain is 0.4% and troubled Italy yields 2.1%.

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