ECB to Blame for Surge in U.S. Yields? Timing Is Suggestive

Updated on
  • Massive bond purchases by ECB pushed investors into Treasuries
  • Yields have climbed on signals of ECB reining in stimulus

One school of thought says that shifting perceptions about the European Central Bank’s policy outlook had a significant role to play in the surge in U.S. Treasury yields that began in September and picked up speed last month, roiling global stocks.

Behind the argument is the observation that ECB policy has had much more impact on markets than the Federal Reserve’s. That’s because ECB bond purchases were so large that they exceeded the net issuance of respective government bonds -- unlike the Fed. That pushed European investors into other markets, such as Treasuries. One estimate has them buying more than a trillion euros ($1.2 trillion) of foreign bonds since ECB QE began.

ECB’s importance popped up on Treasuries traders’ radar screens last June, when President Mario Draghi gave what were perceived to be hawkish remarks at the Sintra confab, sending yields climbing round the world. In the fall, expectations grew that the ECB would announce a taper of its purchases. Yields started jumping in mid-October, when Bloomberg reported the ECB was thinking of halving its QE program.

And traders may want to set a reminder for the minutes of the ECB’s January meeting. Last month’s release said policy makers were open to tweaking their policy guidance given a strengthening economy. Later in January, news came that ECB policy makers were favoring a short taper to bring an end to QE. Those January indications coincided with a surge in yields that’s continuing to affect markets, with 10-year U.S. touching their highest since 2014.

The ECB minutes are due Thursday.

— With assistance by Garfield Clinton Reynolds

(Updates with context on yield in penultimate paragraph.)
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