Why ECB boss Draghi's speech failed to stop bond market "rout".......

Thursday 4th June 2015

Why ECB boss Draghi's speech failed to stop bond market "rout".......

 "Sovereign bond sell-off speeds up after Draghi volatility alert" , The Times , p.40

Just to get the measure of things, we'll take another look at the German 10yr Bund (remembering that prices move inversely to yields) ....... Back in mid-April , its yield reached a low of 0.07 basis points. Continuing the reversal from that point, the last two days' action alone have seen the yield rise .33 basis points  --  a record 2 day move since 1998. Earlier this morning, we saw a high (so far) of 0.99 basis points. These staggering moves are being mirrored by other leading global bond markets and are prompting fears of a crash.

Much of blame for yesterday's move is being laid at the door of European Central Bank president Mario Draghi, who spoke after the ECB's interest rate policy meeting. But what did he say that was so inherently bearish for bond markets ? Well, not too much actually ..... at least in normal circumstances.

 He announced that Eurozone interest rates were being left unchanged  --  utterly expected and of no market consequence.

He reaffirmed once again that the ECB intends to see its QE bond-buying programme through to completion in September 2016  --  hardly news that could be taken as bearish. **

But, and this is what got the market's attention, he also expressed a relaxed attitude to the volatility that is now part and parcel of bond market movements, suggesting that it was an inevitable function of very low-level interest rates. Whether anybody truly expected Mr Draghi to announce some kind of calming measure (like what , exactly ?) is unclear. Perhaps nervous bondholders just wanted the man to show concern on the part of the ECB, though how much this would have soothed the market is open to serious doubt.

We need to remember that the pace and extent of the moves is exaggerated by the now constant problem of illiquidity. But from this angle, the fall in bond prices (and rise in yields) looks like a continuation of the market re-positioning evident since the reversal started in mid-April, but perhaps with different players. The earlier part of the move might be put down to so-called "fast money" --  which is to say, those who bought bonds at almost any price expecting to be able to turn them for a quick profit into the ECB's QE programme, and were forced to bail out when things went the other way. Now, the suggestion is that longer-term investors have become genuinely concerned that receding deflation worries and better growth numbers in the Eurozone signify the need for a fundamental re-appraisal of the future for bond markets, and may mean that it's time to cut their loss-making positions.

Whichever way the market goes from here, the only certainty is that many will get burned by the very volatility that Mr Draghi has come to accept as a fact of life.

 ** For a view that it will be a very long time before the true effect of QE can be judged, and therefore not only should the full programme be implemented but it may even have to be extended, see Oliver Kamm in The Times, p.41

Reminders for tomorrow :

Greece due to repay 300m euros to the IMF. Latest reports (rumours?) suggest the Greeks may have the money, but may also decline to hand it over without significant further compromises from creditors. The posturing continues.......

US Employment data ...... the highly volatile non-farm payrolls due 225,000 , overall unemployment rate due 5.4%