There were wild fluctuations today in European bonds as the ECB announced it would Hold Interest rates at Zero but Taper Bond Purchases.

The ECB is stuck between opposing interests and some of the details of its announcement lead to Alice-in-Wonderland results.

  1. ECB holds rate at zero percent
  2. ECB extends QE until December 2017
  3. ECB lowers QE purchases from €80bn a month to €60bn a month
  4. Draghi says he is not tapering
  5. Draghi says central bank will remove floor for bond purchases below deposit rate

See if you can figure out which of the above is straight from Alice-in-Wonderland. Hint there are two items.

Here is commentary from the Telegraph link above.

ECB’s revamped asset-purchase programme triggers market confusion.

Today’s announcements have opened the gate to market volatility, as investors seized attempted to capitalise on different aspects of the QE extension.

While bond bears were spooked by talk of immediate tapering, with 10-year bund yields climbing to year-long highs, bullish investors were upbeat about the lifting of deposit rate floor, as the drop in the lower-maturity bound means a new range of securities qualify for the central bank’s asset purchase programme.

It seems that the central bank has become stuck between two opposing interests: the other central banks, which are against extended quantitative easing, and the public, which is still looking to the ECB for fiscal stimulus.

In the end it seems today’s announcement is thus a sticky compromise – complete with plenty of twists and turns, gains and reverses.

Try as he might to play down the questions of tapering following the changes to QE, Mr Draghi has failed to convince many investors.

European Bond Market Reaction

ECB’s Balance Sheet

Bond Reaction

The Guardian reports Markets soar as ECB extends QE programme until December 2017.


  • ECB extends QE scheme by nine months
  • Markets jump
  • Draghi insists he’s not tapering his stimulus

The yield on short-term bunds has fallen deeper into negative territory, meaning prices have jumped because the ECB has now given itself the ability to buy this debt.

But the yield on longer-dated bunds has risen, showing that investors are dumping the debt — showing disappointment that the QE rate has been cut to €60bn per month.

Draghi was adamant that the ECB is not “tapering” its QE programme, leaving some City experts a little confused.

The ECB president argues that today’s changes to not amount to tapering, as there’s no plan to stop asset purchases.

“The natural way to look at a word like that is to have a policy whereby purchasers would gradually go to zero, and that’s not been discussed or, as a matter of fact, it’s not even been on the table,” said Draghi

Draghi gave increasingly terse answers to journalists who tried to push him on this issue — clearly the president doesn’t want to provoke a US-style ‘taper tantrum’ by encouraging bond investors to sell up.

He insisted that the ECB could boost the pace of asset purchases if circumstances demanded, or run the programme into 2018.

Why Did Stocks Soar?

The ECB’s announcement of changes to the parameters of the asset purchase programme from January by increasing the maturity range to 1-30yrs from 2-30yrs and buying assets yielding below the deposit rate (‑0.4%) for the first time – also led to a sharp declines in the yields at the short end of the curve, reinforcing a curve steepener bias. The prospect of tapered monthly purchases and lower-for-longer negative yields means that the ECB’s reflation channels have shifted in favour of a weaker euro and higher equity markets, with negative discount rates and a cheaper exchange rate clearly benefiting stock valuations.

The above from Lena Komileva of G+ Economics via The Guardian.

Draghi-In-Wonderland Announcement


The Alice-in-Wonderland part of the announcement was two-fold point: First, Draghi insists he is not tapering.

Second and more importantly, removal of the interest rate floor means the ECB might buy bonds below its deposit rate meaning it will pay interest on those bond purchases. From the BBC article ECB extends bond-buying scheme but at slower pace

Kathleen Brooks of City Index described the ECB meeting as a “financial version of Alice in Wonderland” given some of the changes the bank was forced to make to its bond-buying scheme.

“It will now include bond purchases below its own deposit rate, which is already minus 0.4%. Thus, the ECB will be paying to hold some bonds that will be included in its QE programme. The craziness doesn’t stop there; some of those bonds have a negative yield because of the ECB’s QE programme in the first place,” she said.

“The ECB has had to buy negative-yielding bonds because it has bought all the eligible higher yielding stuff, so it has no choice.”

Mike “Mish” Shedlock