10yr yields rocketed from 1.94 to 1.81 after this morning’s ECB QE announcement and then leveled off right in between (that’s 1.875 for those of you playing along at home). Funny thing about 1.875 is that it is exactly where yields ended yesterday. In other words, bond markets were perfectly unchanged day-over-day, despite massive intraday volatility.
Perhaps even more striking was the fact that German bond markets also returned to yesterday morning’s opening levels (from before the ECB leak). So we have the two biggest interest rate benchmarks expressing very little bias in either direction following this game-changing event.
Is that because it was so well priced-in to expectations? That’s certainly part of it, but there’s legitimate reason for indecision at this stage too. While it’s true that simply getting to the QE starting line is an impressive, symbolic victory for the ECB, it’s equally true that it will take more than a symbolic victory to create lasting change in the Eurozone. It will also simply take some time for the realities to hit (or not hit) markets. This depends heavily on whether or not we see another legal challenge from Germany. There are already calls for another lawsuit similar to the one that blocked the OMT bond buying program.
For now, the biggest winners are stocks. They don’t have any of the downsides to consider like bond markets. European averages soared to their best levels since 2007. Even SPs closed more than 30 points higher from the morning’s lows.
The bottom line here is that had QE been underwhelming, stocks would have tanked and core bond markets very well may have rallied further. But what we got ended up being surprisingly strong given the ECB’s track record of underwhelming announcements. That means it could hurt bond markets in the short term. Reason being: even if this iteration of QE can’t cure all ills, if it merely helps stem some of the tide of impending deflation and recession in the Eurozone, it will draw some of the panic premium out of safe-haven bond markets.