When the ECB announced that it was going to start its own version of the Federal Reserve’s quantitative easing with a €60bn a month bond buying programme, it was a fairly safe bet that something significant was going to happen eventually. Last week it did.
On Thursday of last week European bonds bounced around in the most exaggerated bout of volatility since the euro zone debt crisis, with no clear trigger in terms of new economic data and no clear end in sight. The yield on the Germany 10y Bund spiked by 21bps to 0.80 per cent and then fell back to 0.59 per cent.
Some analysts said they thought the sell-off was merely a correction to the bond rally that markets have experienced over the past year. As YieldReport has reported over recent months, as soon as the ECB’s QE initiatives kicked in many institutional investors bought euro zone debt in bulk, pushing bond prices up and pushing the euro down. This kind of atypical volatility can often prove to be breeding ground for seismic market shifts and so it proved to be this time.
Factor in the recent recovery in the price of oil and effect it will have on the inflation prospects for developed nations and the market seemed ripe for a bout of extreme bond volatility. The yield on the 10y German Bund went as low as 0.05 per cent, something of a record, and some tipped that it would carry on down to zero. Last week Poland became the first emerging market government to sell debt at a negative yield, with a Swiss franc-denominated SFr80m 3y bond that will pay no coupon and yielded minus 0.213%.