Pressure on ECB to follow Fed Reserve on rate cuts

Updated: Dec 30 2008, 06:27am hrs
The world's biggest bond investors are betting European Central Bank (ECB) president Jean-Claude Trichet will be forced to follow Federal Reserve chairman Ben S Bernanke and step up the pace of interest-rate cuts.

BlackRock Inc, Schroder Investment Management and Standard Life Investments Ltd, which together oversee $1.6 trillion, are buying German debt securities even though yields are close to record lows.

Barclays Capital, the top primary dealer of German debt, says bunds offer "unprecedented value" because the ECB will accelerate rate cuts as the economic slump deepens.

"It still makes sense to be long selective markets and Europe is one of those," said Michael Krautzberger, a European fund manager in London at BlackRock, which manages $1.3 trillion. "The ECB is behind the curve."

While the Fed reduced its target rate 4.25 percentage points this year to as low as zero, and the Bank of England cut its benchmark by 3.5 percentage points to 2%, the Frankfurt-based ECB lagged behind.

The ECB lowered the main refinancing rate by 1.5 percentage points to 2.5% and will cut the benchmark rate 1 percentage point to 1.5% by June, based on the median of 15 economists' forecasts compiled by Bloomberg.

Even though Trichet said in a December 16 speech further reductions may fail to bolster the economy as long as banks refuse to lend to each other, the ECB may bring its key rate closer to the Fed's, according to Gregor Macintosh , a money manager in Edinburgh at Standard Life. The firm has about $265 billion in assets.

"The European economy will underperform the US next year," Macintosh said. "On a relative basis, European bonds look more attractive than the US market."

German bunds returned 12.1% this year, including price gains and reinvested interest, the most since gaining 16% in 1995, according to Merrill Lynch & Co. index data. French government debt returned 11.5%, while Spanish bonds added 8.8%.