How to survive against negative rates in Europe?

Watch our analysis in the series OUR EXPERTS EXPLAINS: #3 Negative rates in Europe, by Cyril Regnat, Head of Research Solutions

Should we expect more negative rates within the Euro zone?

As the FED will significantly lower its policy rates by the end of the year with 75bps of expected declines, pressure will increase on Mario Draghi's shoulders. By adding the risk of a no-deal Brexit and to avoid the strengthening of the euro on the foreign exchange market, it is likely that the ECB will lower its deposit rate by 10bp to -0.50% by next September. And that ECB will also introduce a tiering system on excess liquidity. This last decision will notably make it possible to relieve the banks which are increasingly suffering from the persistence of negative interest rates.

What impact does it have on investors' behavior?

Mechanically, the ECB's fall implies even more negative risk-free rates, which explains the transition of the French sovereign under 0 to 10 years a few days ago. In this context, investors will have no choice but to take more risks by buying longer bonds in terms of maturity or riskier bonds in terms of credit quality.

How to survive against negative rates?

By taking risks but reasonable ones because, unlike the previous years, the deterioration in the economic outlook goes hand in hand with the rise in credit risk. One can favor issuers offering yield and, as far as possible not to be exposed to No-deal Brexit or the Trade War's risks. Italian sovereign securities will also offer an interesting source of diversification, as Italy is still one of the few sovereigns to offer attractive levels of valuation.