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Europe’s taper tantrum exposes bond market vulnerability

Any movement in eurozone policy rates in the near future remains unlikely, but the mini taper tantrum at the end of June shows just how sensitive markets are to central bank signalling.

When European Central Bank (ECB) president Mario Draghi stated that “deflationary forces have been replaced by reflationary ones” at the ECB Forum on Central Banking in Portugal on June 27, he knew exactly how the market would interpret that statement.

He had already declared that “the threat of deflation is gone and reflationary forces are at play” earlier in the same speech. He could have saved his breath and simply said “taper”.

That is what the market heard, and bonds responded accordingly. Between Draghi’s speech and Friday, German 10-year yields blew out 31.7 basis points, France 32bp, Italy 36.9bp, Spain 30.1bp and the UK 30.5bp, while yields on 10-year US treasuries rose by 22.9bp.

Draghi’s comments came in the same month as the ECB published a study of the implementation and impact of its corporate sector purchase programme (CSPP) since its launch a year ago. Its findings will come as little surprise to those in the region’s bond markets.

“Credit premium has been in almost continuous decline since the start of the programme,” the authors of the ECB study point out, reflecting “investor appetite for bonds issued by lower-rated companies”. Another observation is that “investors are rebalancing their portfolios to favour more risky, non-eligible assets.”

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