Mr. Draghi announced yesterday that the European Central Bank (ECB) will start buying corporate bonds from large corporations like Siemens, Telefonica, Renault, etc. The ECB will work with 7 banks across Europe to facilitate this form of “corporate QE”. That is really a big change as governments mostly do not buy into the corporate world. Moreover, the ECB has chosen NOT to buy U.S. Treasuries, which is a shockingly trend changer to say the least. The question becomes who is going to buy those U.S. Treasuries going forward, and the probability of another round of QE in the U.S. is definitely increasing as U.S. bonds which will come due will need refinancing.
With that, the ongoing outflow from the U.S. bond market (which was discussed during our May webinar) is going to continue, and even strengthen. As the ECB is feeling reluctant to invest in U.S. Treasuries, for one reason or another, it could be the trigger for other central banks and corporations to follow that same path.
The Germany Bond put an all-time low yesterday, spiking to -.05. Indeed, you read that correctly, the 10 Year German Treasury went into negative territory, as seen on the next chart.
The U.S. Fed now seems to find itself between the proverbial rock and hard place. On the one hand, the Fed cannot raise rates as the economy isn’t doing well at all. On the other hand, the Fed is obliged to come with an answer to the ECB’s announcement that they will buy less U.S. Treasuries, and needs to find a way to make its Treasuries more attractive.
How exactly this will play out is hard to say. Will stocks go up or down, what will gold do, how will global bond markets react? In any case, this week’s development is certainly a game changer. Investors should closely watch how markets are reacting in the coming days, as markets need a bit of time to decide on a (new?) direction. Do not try to outsmart the market in this situation, but try to understand the trend(s), and follow what is happening as outsmarting the markets in this type of situation is certainly not done.