ECB quantitative easing looks set to continue for some time


Paul Rayner, Head of Government Bonds

26 October 2017

Those expecting a more radical announcement from the European Central Bank (ECB) or a stronger reaction from markets will have been disappointed, the rally in bond markets was as much down to technical factors from previous bouts of selling as any overly dovish tones from the press statement and following conference. Periphery markets did get a slightly more meaningful boost, perhaps due to concerns that the supply of German bunds available to the ECB might begin to run dry.
However, in our view, the tightening of European monetary policy will continue to be a very gradual process, with further comments made today that there are no plans for a cliff-edge end to the bond purchase programme. As Mario Draghi himself put it during today’s press conference, the reinvestment of principal payments will be ‘massive’, and it’s worth remembering that despite the squeeze on liquidity entering the markets, the ECB will still be buying €30 billion per month. 
With this level of new cash continuing to be injected into the system and with the consequent impact on asset prices that this will bring, any meaningful rise in European bond yields over the near term will be predicated on other economic and political factors.

Those expecting a more radical announcement from the European Central Bank (ECB) or a stronger reaction from markets will have been disappointed, the rally in bond markets was as much down to technical factors from previous bouts of selling as any overly dovish tones from the press statement and following conference. Periphery markets did get a slightly more meaningful boost, perhaps due to concerns that the supply of German bunds available to the ECB might begin to run dry.

However, in our view, the tightening of European monetary policy will continue to be a very gradual process, with further comments made today that there are no plans for a cliff-edge end to the bond purchase programme. As Mario Draghi himself put it during today’s press conference, the reinvestment of principal payments will be ‘massive’, and it’s worth remembering that despite the squeeze on liquidity entering the markets, the ECB will still be buying €30 billion per month. 

With this level of new cash continuing to be injected into the system and with the consequent impact on asset prices that this will bring, any meaningful rise in European bond yields over the near term will be predicated on other economic and political factors.

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.