29 Jan Fixed Income Perspectives
Voya Perspectives – Market Series – Fixed Income Perspectives – January 29, 2015
Resolutions that promise sweeping change can be inspiring in concept but daunting to implement. But after the new year’s shaky start — characterized by a spike in equity and interest rate volatility, continued weakness in oil and commodity prices, and a strengthening dollar — the European Central Bank finally moved beyond rhetoric, revealing a concrete game plan to defeat the euro zone’s own version of “deflategate” in 2015 and beyond.
With negative deposit rates in Germany, anti-austerity politics gaining momentum in Greece and near-zero euro zone inflation, it had become clear that Mario Draghi’s July 2012 pledge to do “whatever it takes” to keep the currency bloc intact would require more than just an assortment of ineffective half-measures. Enter the ECB’s historic pledge to purchase €60 billion of assets per month through September 2016. And while the inclusion of sovereign debt in the program drew headlines, the most important detail may be the plan’s seemingly open-ended nature; Draghi’s focus on pushing inflation up to the central bank’s target suggests that purchases could extend beyond the stated end date should sufficient progress here be lacking. The ECB’s open-ended resolution may be intended to backstop the currency union and stabilize financial markets; if the U.S. QE experience is any indication, this will also buy policymakers time to address the fiscal, social and political issues underpinning the euro zone’s very real growth and inflation woes.