Marketing Communication
Euro Corporate Weekly Get used to high volatility
Group Economics Macro & Financial Markets Research Hyung-Ja de Zeeuw & Aline Schuiling +31 20 628 3551 Hyung-ja.de.zeeuw@nl.abnamro.com
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05 June 2015
Draghi’s intervention to cap bond yields fails due to volatility remark, yields soar Market is stuck between early QExit speculation and ECB intervention Total returns are in negative territory for the second time this year Credit curves steepen as investors find safe haven in short end of the curve
Draghi fails to stem surge in Bund yields
Market is stuck between early QExit speculation and ECB
Mr. Draghi’s verbal intervention to cap bond yields and the
intervention
euro failed spectacularly. His remark that “…we should get
The move in yields in itself is not remarkable. It’s the pace. In
used to periods of higher volatility” completely wiped out the
just three days the 10y Bund yield went from around 0.50% to
dovish content of the speech. Already during the press
almost 1% before reversing. This is an unprecedented move.
conference, the yield on the 10y Bund continued to surge, breaking through the 0.85% level. The euro strengthened
The high level of volatility will keep popping up in the coming
further against the dollar.
months as markets will be yo-yoing between better macro fundamentals and ECB intervention. Positive surprises of
On Thursday morning, the 10y Bund yield and the euro
macro-economic data will start a sell-off in the Bund. The
continued their climb from the day before. The Bund was well
tightening financial conditions then provoke a verbal
on its way to touch the psychologically important 1% mark,
intervention of the ECB.
only to retrace just 0.005% before actually reaching it. With an intraday print of 0.995% we’ve reached a new year to date
We think the ECB will continue with QE despite recent better
high.
economic data. Indeed, Mr Draghi stressed that if anything, the ECB could step up QE if needed rather than end it early. The
ECB’s verbal intervention to cap bond yields fails
financial conditions due to higher bond yields and a stronger
In %
Draghi: "get used to periods of higher volatility"
1.0
0.8
euro, as it could nip the economic recovery in the bud. Following the upward trend in bond yields of the last few days, financial conditions have tightened somewhat more than the
0.6 0.4
ECB is determined to fight against any early tightening of
Recovery long- term inflation expectation
ECB assumed in its projections for this year. Given current Coeuré announces ECB front-loading
0.2 0.0 01/04
market prices, weighted average eurozone bond yields are somewhat above the levels assumed for this year, while the gap was more significant earlier on Wednesday when the bond
11/04
21/04
01/05
11/05
21/05
31/05
10y Bund Source: ABN AMRO Group Economics, Bloomberg
sell-off was in full flow. The ECB’s projections show inflation just about reaching the target in 2017, at 1.8% compared to the its price stability goal of close to but below 2%. This means that the sell-off in the bond market could eventually threaten the ECB achieving its goal.
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Bloomberg: ABNM