Courtesy of Mish.
There were wild fluctuations today in European bonds as the ECB announced it would Hold Interest rates at Zero but Taper Bond Purchases.
The ECB is stuck between opposing interests and some of the details of its announcement lead to Alice-in-Wonderland results.
- ECB holds rate at zero percent
- ECB extends QE until December 2017
- ECB lowers QE purchases from €80bn a month to a month
- Draghi says he is not tapering
- Draghi says central bank will remove floor for bond purchases below deposit rate
See if you can figure out which of the above is straight from Alice-in-Wonderland. Hint there are two items.
Here is commentary from the Telegraph link above.
ECB’s revamped asset-purchase programme triggers market confusion.
Today’s announcements have opened the gate to market volatility, as investors seized attempted to capitalise on different aspects of the QE extension.
While bond bears were spooked by talk of immediate tapering, with 10-year bund yields climbing to year-long highs, bullish investors were upbeat about the lifting of deposit rate floor, as the drop in the lower-maturity bound means a new range of securities qualify for the central bank’s asset purchase programme.
It seems that the central bank has become stuck between two opposing interests: the other central banks, which are against extended quantitative easing, and the public, which is still looking to the ECB for fiscal stimulus.
In the end it seems today’s announcement is thus a sticky compromise – complete with plenty of twists and turns, gains and reverses.
Try as he might to play down the questions of tapering following the changes to QE, Mr Draghi has failed to convince many investors.
European Bond Market Reaction
10yr Bund yield reacts to ECB:
Tapering – sell
No, wait, more purchases – buy
No, wait, collateral lending + yield floor scrapping – sell pic.twitter.com/3qv9kgSptk— Chris Whittall (@Chris_Whittall) December 8, 2016
ECB’s Balance Sheet
This is how quantitative easing has been deployed by the ECB https://t.co/RHS7BWwz6y pic.twitter.com/iyqkTS6XRP
— Bloomberg (@business) December 8, 2016
Bond Reaction
CHART: German sovereign curve today vs yesterday. Steepening after #ECB decides to extend QE + scrap depo rule. Everything < 8Y rallying. pic.twitter.com/BtfEEyZxZc
— Maxime Sbaihi (@MxSba) December 8, 2016
The Guardian reports Markets soar as ECB extends QE programme until December 2017.
Summary
