Central banks / bond markets

ECB changes inflation management

If the recent press conference by ECB President Mario Draghi showed anything, it was that the monetary authorities are anything but satisfied with the inflation trend. Inflation expectations, in particular, are a cause for concern as they have now fallen below the levels that would have been reached at the time of the launch of the The main factors were the bond purchases and the increase in bond purchases from EUR 60 billion to EUR 80 billion. The monetary authorities have taken various measures to ensure that inflation expectations do not lose their roots. Only in June was the forward guidance extended to mid-2020. In addition, the ECB had new TLTROs on the way. However, all these measures seem to have had little effect, as inflation expectations have continued to fall. This development could, in the final analysis, indicate that market participants fear that the ECB has lost control over…

US Federal Reserve remains reasonable

US Federal Reserve remains reasonable As expected by most market participants, the US Federal Reserve has lowered its key interest rate by 25 basis points. At the same time, it ended the balance sheet reduction prematurely. Overall, the Fed has thus loosened the monetary policy environment slightly, but avoided classifying this as a trend reversal. It has thus resisted the high political pressure and continued its relatively sensible monetary policy. The statement published after the interest rate decision sounds optimistic and hardly changed. For example, the Fed has attested that economic growth has continued to be moderate and that consumer spending has increased. Market-based inflation expectations remain low. The effects of the cooling global economy and subdued inflationary pressure explain the 25 basis point cut in key interest rates. Now the developments will be „further observed“, which is a linguistic disarmament compared to the phrase „closely observed“, which usually signals…

ECB surprises with triple jump

The ECB adjusted its forward guidance at yesterday’s meeting. While the monetary policy statement previously stated that key interest rates would remain at the current level until at least the middle of next year, this outlook has now been extended to include the possibility of a low level of key interest rates. A reduction in the deposit rate is therefore only a matter of time. It should also be emphasised that the central bank superiors instructed the ECB staff to draw up proposals for the design of a tiered deposit rate. According to Draghi, a possible interest rate cut would be accompanied by mitigation measures. The ECB Committees are also mandated to examine possibilities for revitalising the Bond Purchase Programme (APP). In this context, Mr Draghis has pointed out that the ECB may also be targeting new asset classes. Even though the guardians of the currency have hesitated to lower…

How low can Bund yields fall?

The 10-year Bund yield recently hit the headlines when it dropped -0.41% below the current key ECB interest rate, the deposit facility rate. So instead of parking the available liquidity at the ECB at -0.40% cheaper, some investors preferred to buy ten-year Bunds. ECB President Mario Draghi provided the impetus for the Bund Rallye, which led the yield of ten-year Bunds to a new all-time low of a good 20 bp below the old one. He said in his speech at the ECB Forum in Sintra on 18 June 2019 that further stimulus would be needed if economic conditions did not improve over the summer. Accordingly, the ongoing uncertainty about the EU budget dispute with Italy, Brexit or trade disputes constitutes in itself a materialisation of the risk factors. Since then, the yield on treasures has been 0.73% outside the previously valid range. The 15 bp decline in yields suggests…

Interest – how low can you go?

A few days ago, the yield on 10-year German government bonds fell below the -0.4 percent mark. The European Central Bank has set the deposit rate at -0.4 per cent, i.e. the rate at which banks can park their excess liquidity at the ECB. According to this report, investors seemed at least temporarily more attractive to invest their money in long-dated German government bonds, even though they would have to pay an additional penalty interest rate for this, even compared to the safe, flexible and short-term investment at the ECB. Although the Bund yield has recovered somewhat in recent days, the question arises after this experience: How low can yields on safe government bonds still fall? We come to the conclusion that there is still a lot of „air down“ when it comes to returns. If the smouldering economic and political risks such as the „hard“ Brexit and a further…

The US Federal Reserve is determined to cut interest rates

Yesterday, Fed Chairman Jerome Powell, at a hearing before the House of Representatives Banking Committee, gave a relatively clear signal that the Fed intends to cut interest rates. Three rate cuts now appear possible and probable over the next twelve months; the first cut could take place as early as July. The Federal Reserve’s monetary policy minutes published yesterday evening indicate that the June Council’s monetary authorities generally assumed that economic activity would continue to grow at a moderate pace. In this context, the Fed representatives expect a sustained strong development in the labour market and an inflation rate in the range of the target value. However, according to the assessment of numerous Council members, the probability of a less favourable development had increased. Among other things, risks would emanate from the still unresolved trade dispute. From these different comments and assessments it can be deduced that the neutral key…

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