*Cash is the current overriding concern for individuals, companies and suppliers

*The outlook is turning more negative on government bonds

*A single, pan-European bond issue could be moving closer to reality

The European Central Bank’s (ECB) latest (and much larger) response to the market fallout from the Covid-19 crisis is far more impressive than what it initially pledged last week, and more in line with what the market had been hoping for. The ECB’s initial response to the crisis had been to announce only a modest increase in its quantitative-easing (QE) program, and this, together with very poor market liquidity, pushed sovereign spreads in the euro area wider versus German government bonds (bunds), defying comments from ECB President Christine Lagarde that this would not be allowed to happen.

This latest €750bn (US$794bn) debt-buying package is notable not only for its size, but because for the first time it includes Greek government bonds in the purchase plan. We would anticipate that these purchases should provide some backstop to the rise in non-German sovereign-bond yields, along with extra support for the corporate bond market.

Given the US Federal Reserve’s experience with QE this week (it had already spent $175bn and yields still rose), it wouldn’t surprise us if the ECB comes back to the table for a third time to promise further financial support to bolster the escalating fiscal deficits around the eurozone.

Turning Negative on Government Bonds

The occurrences of the last few days have led us to turn negative on government bonds, because as economies run the risk of grinding to a standstill in the current crisis, cash becomes the overriding concern for individuals, companies and suppliers who need to get paid.

The central banks are trying their best by slashing interest rates, but it is the availability of money that is the problem, rather than its price. For us, government spending through initiatives such as tax cuts, benefit increases or loan guarantees is the only answer, as such actions will supply the necessary cash to allow businesses and individuals to keep going.

QE helps because it finances some of the government spending, but it will still require a substantial issuance of bonds, which is putting upwards pressure on bond yields as we have seen play out this week. In these unprecedented times, as has been mooted again over the last couple of days, a pan-eurozone bond where all members issue as one group, could be on the cards. Could Germany finally be willing to share its AAA credit quality?

Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice

Important information

This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.

Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.