Shorting long end of the yield curve against shorter end has remained one of the top trades since last year, which was further extended with European Central Bank’s (ECB) asset purchase program of €60 billion per month as investors were expecting deflation in Euro zone.
However, all seems to have changed since last few weeks as sovereign bonds especially the longer ends saw the yield rise rapidly especially in European monetary union.
German 10 year bund has erased all the gains made this year, yield is currently at 0.63% as of now.
Risks associated –
- ECB has so far remained determined to continue its asset purchase program till September 2016 at least, however that might come under threat should the inflation rise rapidly in Euro zone along with rising bond yields and inflation expectation.
- ECB operates on majority consensus, hence QE was approved in spite of Bundesbank’s oppose to it. However it would be difficult to convince Mr. Weidman to continue the program if inflation gathers pace.
Moreover higher energy prices would put upward pressure on inflation, given oil stabilize at current level or higher.
It would mean rapid rise of Euro, should the program gets abandoned or adjusted prior to the tentative date.
- Focus now turns on European inflation statistics as well as inflation expectation over 5 year.
- Communications from ECB president Mario Draghi and Bundesbank president Jens Weidman becomes vital to gauge their take on recent development.
The material has been provided by InstaForex Company – www.instaforex.com