However, the ECB’s floor on the yield at which it will buy bonds may get around this problem, freeing up more of the market for it to purchase. The ECB stated it would only buy sovereign debt with a maturity of more than two years and a yield of more than -0.20 per cent, or that of the current deposit rate. This signals to bondholders that price appreciation on the bonds will be limited and that by setting the floor on yields the same as the deposit rate, institutions should be indifferent to holding money with the ECB on deposit or selling their bonds.
The upshot is that yields in the eurozone are not going anywhere soon and are likely to fall in the near term as the market strives to figure out where the ECB is buying bonds. This also means that the 2 per cent + yield on offer on a US 10-year Treasury is looking relatively appealing and that as investors hunt for income, the yields in other bond markets are likely to be constrained. However, investors should be aware that yields will eventually move higher, especially as inflation expectations increase, along with volatility in the fixed-income market. Diversified and flexible strategies are the best way to protect portfolios and achieve a more efficient risk/reward trade-off.
Kerry Craig is global market strategist of JP Morgan Asset Management
