Marketing Communication
Group Economics
Euro Rates Weekly
Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com
Fear of volatility
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05 June 2015
The dovish tone of Mr Draghi’s speech fell on deaf ears earlier in the week Government bond yields surged as Mario seemed to accept high volatility We judge that the ECB should intervene as a tightening of financial conditions makes QE less effective and fear that the ECB has lost grip on markets Intervention is also needed to restore trust of investors in the current dysfunctional market We do not see an improvement of liquidity or lower volatility in the short term
And the supply monitor: Gross core bond supply will amount to EUR 10bn, while peripheral supply will also be significant Nobody wanted to listen to Mario’s QE commitment
Increase in bond yield volatility
ECB President Mario Draghi made it crystal clear in this
In %
week’s press conference that the Governing Council plans to
Draghi: "get used to periods of higher volatility"
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continue QE despite recent better economic data and a pickup in inflation data. He even stressed that if anything, the ECB
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could step up QE if needed rather than end it early. So as
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expected, he went out of his way to pour cold water on ‘QExit’ speculation. This shows that the ECB wants to fight against any early tightening of financial conditions, as it could nip the economic recovery in the bud. But unfortunately for Mario, his verbal intervention failed spectacularly as government bond
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Recovery long- term inflation expectation
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yields surged and the euro appreciated. But everybody heard what he had to say about volatility
Coeuré announces ECB front-loading
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10y Bund Source: Bloomberg
Mr Draghi first started to elaborate quite extensively on possible explanations of the initial bond rout in April. His
Why should the ECB intervene?
explanations varied from fundamental drivers (growth and
We think that Mr Draghi was trying to make clear that the
inflation expectations) to a number of technical reasons.
market itself should decide where yields should be. In
Examples of the latter included, extremely crowded positions,
essence, if QE is really working, yields should go up on the
a temporary increase in government bond supply and the self-
back of better inflation and growth expectations, like the case
reinforcing increase in bond yields as the eligible universe of
in the US. Logically, the market reacted liked a wounded
bonds grew. The central bank president admitted that QE has
animal as it hoped that the ECB would come to save the day
led to lower liquidity in bond markets. Supermario continued
by suppressing the extreme volatility. It was only recently when
his speech by explaining that “at very low levels of interest
ECB Executive Board member Coeure said that the increase
rates, asset prices tend to show higher volatility”. The devil
in yields in April wasn’t worrying in itself, but that the pace was
was nonetheless in the detail as Mr Draghi dropped a
troubling. One could argue why the ECB should act as a
bombshell by saying “that we should get used to periods of
saviour as QE is becoming a textbook case. A well founded
higher volatility”.
argument to intervene is that the surge in yields and appreciation of the euro will make QE less effective (for full
Insights.abnamro.nl/en
Bloomberg: ABNM