PIMCO SEES PERIPHERAL BONDS GIVING ECB MORE BANG FOR QE BUCK

As investors speculate about how the European Central Bank may extend its asset-purchase plan in the most effective way, Pacific Investment Management Co. has a simple answer. Refocus on the bonds of Europe’s higher-debt and -deficit nations.

While ECB President Mario Draghi said Sept. 23 it was too soon to decide whether risks to the economic outlook warranted a step-up in monetary stimulus, a majority of economists Bloomberg surveyed predict the central bank will do so by June. Policy makers had already increased the range of assets eligible for buying to include state-backed company securities and a greater percentage of each issue of a sovereign’s debt. Now they could opt to further boost the amount, type of purchases or length of the plan.

“Politics aside, we think the most sensible thing for the ECB to do if it wants to step up its intervention would be to increase its purchases of European peripheral debt, either outright or versus reduced purchases of low-yielding bunds,” Andrew Balls, Pimco’s chief investment officer for global fixed income, said in an interview in London. “These are much larger and more liquid markets than European corporate debt.”

Pimco oversees $1.52 trillion in total assets.

The ECB’s holdings of sovereign and agency debt climbed by 51 billion euros ($57 billion) last month. Holdings of covered bonds rose by 10.1 billion euros, and of asset-backed securities by 1.9 billion euros. The central bank had already bought 54.8 billion euros of Italy’s public debt and 39.3 billion euros of Spain’s as of Sept. 30.

Without expanding the program, total purchases currently planned throughout the ECB’s quantitative-easing program will equal around 11 percent of the region’s 2014 nominal gross domestic product, compared with 21 percent under the U.K.’s QE easing and almost 25 percent in the U.S., according to Pimco’s calculations.

That leaves the ECB with plenty of room to buy more government debt, the money manager said, while purchases of ABS and covered bonds look like “a waste of time and effort.”

When the ECB announced QE, it said purchases of bonds would be based on the so-called capital key, which is roughly in proportion to the relative size of each euro-area economy.

Pimco’s Foreign Bond Fund has lost 0.13 percent this year, still outperforming 77 percent of peers as of Oct. 7, according to data compiled by Bloomberg.

source: Bloomberg