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ECB Says Lower Yields and Scarce Bonds All Part of QE Plan

The European Central Bank may well be printing money via its landmark government bond buying program, but it could also be destroying some of the financial system’s own printing presses in the process.

Little over a week after the ECB launched its 1 trillion euro ‘quantitative easing’ campaign, financial markets are fretting that there is a shortage of bonds for the central bank to buy.

This has created a hiatus in the plumbing of the global financial system that’s seen bond yields and long-term interest rates vanish across the spectrum and move deeply negative in some cases, especially benchmark German bunds.

ECB officials insist this ‘scarcity’, rather than shortage, is a deliberate part of QE and forces down yields on the lowest risk bonds in order to push banks and investors into riskier lending more useful to the economy.

But the stimulus to cash flows around financial markets rather through the high streets has been far more seismic.

“ECB QE will not have a significant effect, at least in our view, on the real economy – but it is having a massive effect on financial markets,” said Phil Poole, head of Research at Deutsche Asset & Wealth Management.

“There is clearly a distortion in the market which is leading investors generally to take more risk or buy less liquid assets in order to generate a return.”

via Reuters [1]

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Alfonso Esparza

Alfonso Esparza [6]

Senior Currency Analyst at Market Pulse [7]
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza
Alfonso Esparza

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