EC Yields Falling; Who Could Be Buying Without QEs?

In the US Treasury market, the situation has been a little different. The BOND ROUT theory posits that without the Fed to buy up additional supply, yields as a technical factor have to rise putting more upward pressure on rates than already exists from a booming economy. Add to that foreign selling in 2018, it left many expecting an epic selloff. Any day now.

The common battle cry was “who is left to buy up all these UST’s?” The answer, as always, is the banks themselves.

The ECB’s end to QE hasn’t sparked the same worries. A lot of it has to do with similar misperceptions about how bonds work, only in Europe particularly Germany the magnitude is checked. Europe’s central bank went further and ate up a huge chunk of government bond supply during its LSAP run.

That left a smaller float for the private markets, therefore more margin for bond demand even as the ECB exits the auctions. Still, yields were supposed to rise across Europe even Germany if not to the same extent as what was figured for the US BOND ROUT!!!

While the ending of QE will put some upward pressure on yields, low supply from Germany’s robust economy is likely to act as a counterweight, keeping that risk in check.

“For some time now, we have observed a big disconnection between real Bund yields and real economic activity,” said Chiara Cremonesi, a fixed-income strategist at UniCredit. “The scarcity of German paper — and of safe eurozone government paper in general — triggered by QE will remain a key driver of Bund performance next year, and in our view will slow down the increase in real Bund yields towards positive territory.” 

As usual, that’s not what happened up to and including the robust Germany part. The ECB will begin 2019 without any QE but things in Europe are not consistent with how it was supposed to go at its end. At least the mainstream gets that part right, meaning if QE had worked (anywhere) economies would actually be booming and yields would be uniformly upward if to varying degrees.

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Moon Kil Woong 4 months ago Contributor's comment

With oil prices weakening inflation worries have been mollified. The only thing causing inflation right now is trade wars and tariffs. This is the main reason for the US Fed to raise rates and it is not wrong until the threat dissipates. Sadly this is a political choice with economic effects rather than an economic choice. Who knows if it will end. It certainly will continue to hurt the global economy and increasingly hurt the US economy as well.

Gary Anderson 4 months ago Contributor's comment

Seems to me that protecting the collateral is still more important than growth. I think the Fed has to talk up growth, but really in its heart of hearts does not want out of control economic growth:

Howie Sandberg 4 months ago Member's comment

Thanks for the link.