Investor expectations of expanded monetary easing from European Central Bank President Mario Draghi have pushed the amount of euro-area government securities that yield below zero to more than $2 trillion.
Bonds across the region climbed last week when Draghi said the institution will do what’s necessary to rapidly accelerate inflation. The statement recalled the language of his 2012 pledge to do ‘whatever it takes’ to preserve the euro and it solidified investor bets on further stimulus at the ECB’s Dec. 3 meeting. While 10-year bonds fell Monday, the two-year note yields of Germany, Austria and the Netherlands all dropped to records.
‘The ECB is doing little to counter this market speculation,’ said Christoph Rieger, Commerzbank AG’s head of fixed-income strategy in Frankfurt. ‘Should they not deliver now it would clearly cause a huge backlash with regards to the euro and overall valuations.’
The anticipation of greater easing has also undercut the euro. The single currency weakened to a seven-month low on Monday after futures traders added to bearish bets. A 10 basis- point cut in the deposit rate is now fully priced in, according to futures data compiled by Bloomberg, while banks from Citigroup Inc. to Goldman Sachs Group Inc., are predicting an expansion or extension of the ECB’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan.
This post was published at David Stockmans Contra Corner on November 24, 2015.
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