OUTSIDE BOND SWINGS SHOULDN´T TROUBLE ECB / THE WALL STREET JOURNAL

Heard on the Street

Outsize Bond Swings Shouldn’t Trouble ECB

The challenge for investors is to determine if bond yield moves are becoming excessive

By Richard Barley

June 11, 2015 12:24 p.m. ET

 ECB Executive Board Member Benoît Coeuré has made it clear the bank won’t react to short-term volatility, but also won’t allow “excessive fluctuations” in markets to challenge the bank’s pursuit of its inflation target. Photo: Reuters


The eurozone bond market is certainly trying to get used to higher volatility. But Mario Draghi is unlikely to be regretting his choice of words just yet.

In the five days following the European Central Bank president’s warning that higher volatility was only to be expected, the average daily range for 10-year Bund yields has been 0.12 percentage point, according to FactSet data. By contrast, for much of the past year the range has been between 0.04 and 0.06 percentage point. 10-year yields rose as high as 1.06% on Wednesday before falling back to 0.89% on Thursday.   

                                                    
High volatility certainly makes reading the near-term direction of yields difficult. There are arguments for believing that a lot of the move is done. Market perceptions of eurozone growth and inflation have shifted, and investors are now leery of betting on ECB quantitative easing pushing yields ever lower. Set against that, it isn’t clear how much investors have shifted positioning; there could be further selling to come. The market’s focus could yet shift to the U.S. Federal Reserve, and prospects for rate increases.

But other than causing bond investors sleepless nights, does volatility matter to the ECB?

Executive board member Benoît Coeuré set out the balance of forces Wednesday: the ECB won’t react to short-term volatility and risk providing market participants with free insurance.

But it also won’t allow “excessive fluctuations” in markets to challenge the ECB’s pursuit of its inflation target.

The challenge for investors is to determine if moves are becoming “excessive” then. Investors shouldn’t get too hung up on Bund yields yet; while higher yields imply tighter monetary conditions, they are still extremely low by historical standards. And it isn’t just bond yields that matter for the ECB: the trade-weighted euro is still 8.5% below its 2013-2014 average, Berenberg Bank notes, and recent growth in the money supply and positive trends in credit provision also bode well.