As we continue detailing our key themes for the year, we’d note that in our view: 5) #fiscal policy is a right-tail #risk (not left-tail) in 2020; and 6) the negative #bond yields in #Europe and Japan may well turn to negative returns by year end.
While a thoroughly divided #government in the U.S. during an #election year is quite likely to limit the possibility of additional #fiscal spend here, the story in #Europe is a bit different.
Increasingly, we think new leadership at the @ecb, and legitimate questions surrounding the efficacy of the negative/zero interest rate policy, #NIRP, could result in an evolving focus toward #fiscal spend by governments. And Europe could certainly use the boost!
Indeed, we think it’s quite clear that #NIRP isn’t going to galvanize a growth spurt in Europe, as the policy does not push #money from #savings toward spending, but rather works the other way.
In 2019, we saw a marked resurgence in negative yielding #debt, to the tune of $17 trillion by August (the figure has fallen some since), and almost all of it was in #Europe and #Japan.
And while this #debt has temporarily rallied on the back of #coronavirus fears, we think that as the year draws on (assuming the virus spread is mitigated effectively), these negative #yielding #assets will face a huge task in generating positive returns.
Finally, core front-end European rates trade below the #ECB policy rate, which is unlikely to be lowered further, #yield curves are as flat as they’ve been in a decade (minimizing roll-down benefit) and Euro 10-Year #yields sit below all other “crisis” moments of the last decade.
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