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Central banks’ policy continues to shift

A widespread shift in central banks' monetary policy is helping to reduce the attractions of bonds. During October, the ECB announced that it would extend its bond-buying programme until at least September 2018, but will halve the rate of its asset purchases from €60 billion per month to €30 billion. Elsewhere, the Fed began unwinding its US$4.5 trillion balance sheet.

  • 28% of investors believe that the UK will still be an EU member in 2020, according to Fitch
  • Spain's Government took control of Catalonia
  • Moody's confirmed Italy's “Baa2” credit rating and “negative” outlook

“Sentiment in Europe was marred by mounting political turmoil in Spain”

A widespread shift in central banks' monetary policy is helping to reduce the attractions of bonds. During October, the European Central Bank (ECB) announced that it would extend its bond-buying programme until at least September 2018, but will halve the rate of its asset purchases from €60 billion per month to €30 billion. ECB President Mario Draghi cited “growing confidence in the gradual convergence of inflation rates toward our inflation aim on account of the increasingly robust and broad-based expansion”. In most cases, European government bond yields generally fell during the month; the ten-year German government bond yield declined from 0.47% to 0.37%.

In its quarterly survey of European fixed-income fund managers, ratings agency Fitch found that 64% of European investors believe that the downsizing of the ECB's quantitative easing measures will lead to a rise in corporate funding costs. Meanwhile, 28% of investors believe that the UK will still be an EU member in 2020 – compared with 6% at the start of 2017 – and less than 40% believe that there will be a “mutually acceptable agreement” by March 2019.

Investor sentiment in Europe was also marred by mounting political turmoil in Spain, as the country's Government moved to take control of Catalonia following the region's declaration of independence. Credit ratings agency Moody's warned that the prospect of Catalan independence is “unlikely”, but would have a broadly negative credit impact. Given that the region makes a substantial contribution to Spain's overall GDP, the secession of Catalonia would reduce the size of Spain's economy and its ability to raise taxes, although Spain would be likely to retain an investment-grade rating. The yield on the benchmark Spanish government bond fell during October from 1.61% to 1.47% . Elsewhere, the US Federal Reserve (Fed) began unwinding its US$4.5 trillion balance sheet, cutting it by up to US$10 billion per month . The ten-year US Treasury bond yield rose from 2.32% to 2.40%.

Moody's confirmed Italy's “Baa2” credit rating alongside a “negative” outlook. Italy's Government has managed to stabilise the country's banking sector, and the economy is showing signs of stronger growth. Nevertheless, Italy's prospects remain only “moderate” in the medium term, and long-term question-marks remain over the political backdrop and the outlook for fiscal and growth-oriented reforms. The ten-year Italian government bond yield fell from 2.12% to 1.83% over the month.

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