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MBS RECAP: ECB Surprises Markets, But Bonds Liked It

June 13, 2018
by admin

We knew the ECB (European Central Bank) was going to have to address its bond buying program soon, because it expires after September. Several speakers had alluded to the likelihood that it would be addressed in today’s announcement. Markets took that to mean that Draghi would finally talk about the probable tapering announcement at the subsequent meeting.

Instead, the ECB just went ahead and pulled the trigger–several months in advance. In other words, they will indeed continue buying bonds through September. They’ll buy half as many over the next 3 months and then be done by 2019. This eventuality was somewhere in the realm of the market’s expectation, even if we weren’t planning on confirming it so soon.

The early announcement caused a bit of bond market weakness at first, but it was soon forgotten in favor of another facet of the announcement. The ECB said they wouldn’t mess with their low policy rate until after next summer. That’s important piece of mind for traders who were wondering just what ECB speakers meant when they recently said the first rate hike would follow the tapering announcement “fairly quickly.”

Naturally, European bonds saw the lion’s share of today’s rally, but Treasuries definitely benefited. Even after the Retail Sales data came out much stronger than expected, bonds still managed to hold in positive territory. With that, this week’s big ticket events are done. Next week now has a chance to confirm that a bigger picture bounce in rates is taking shape.

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