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Fed vs. ECB: Navigating the ‘Great Divergence’ 

Franck Dixmier 



With the Fed pondering rate hikes and the ECB launching new stimulus, investor concerns are diverging on both sides of the Atlantic, says CIO Fixed Income Europe Franck Dixmier. Look for ways to play wider US–euro-zone spreads and higher volatility.
Following the ECB’s¹ recent decision to strengthen its monetary-policy firepower by adopting a more accommodative stance, fixed-income investors are faced with the unprecedented situation of being subjected to divergent influences from the Fed² on the one hand and the ECB on the other.

US investors are pondering three questions regarding Fed policy:

What is the timing of the first hike?
What will be the length of the rate-hike cycle?
What level will rates ultimately reach at the end of this monetary-tightening phase?

Euro-zone investors, on the other hand, have one question: QE³ or not QE?

Clearly, the primary concerns of central banks and investors on both sides of the Atlantic differ, and there is a real risk that these respective interests will continue to diverge. Anticipations of benign monetary tightening in the US have so far had relatively little impact, but there is nonetheless a major risk of repricing if business indicators rally sharply, or if stronger inflation is confirmed. In the euro zone, persistently weak inflation – which is not to be ruled out – would rekindle speculation that the ECB will implement repurchase programmes among fixed-income securities.

In a context in which euro-zone rates – despite intrinsic support factors – are exposed to higher US yields, we have adapted to this situation by:

Setting up strategies based on US–euro-zone spreads widening further.
Reducing duration through dynamic portfolio management, mainly by buying volatility – which is low and therefore inexpensive – in order to optimise convexity.

1. European Central Bank
2. US Federal Reserve
3. Quantitative easing

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585,, 1-800-926-4456.


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