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A Tale of Two Decembers

On Thursday morning, European Central Bank (ECB) President Mario Draghi stated that the European Central Bank will consider expanding their nine-month old Quantitative Easing program at their December 2015 meeting. I have a feeling if Fed Chairwoman Yellen was there, she would have whispered behind him, “And we’ll be doing something in December, too—December 2016 that is!”


With the Euro plunging, down nearly 2% versus the U.S. Dollar after President Draghi’s press conference and European sovereign bond yields dropping to the point where, for the first time in recorded history, Italian two-year note yields went negative (Spain is also negative for those keeping score at home), two things are apparent to me:

The first is that Draghi all but said that the ECB will be expanding its Quantitative Easing policy in December, which should keep the Euro pinned down around its current 1.11 level or lower. The second is, based on the ECB’s probable upcoming actions, the Fed won’t be “lifting off” for quite some time, and by quite some time, I mean late 2016. The risk of a massive appreciation of the U.S. Dollar versus the Euro would be too great in the eyes of many Fed Governors. These developments are all very constructive for risk assets.

If we needed any assurance that this is the case, stocks in Europe and the U.S. surged, while investment grade corporates and municipals ripped tighter. In municipals, finding bonds is a real challenge. Even the battered high yield corporate sector has shown signs of real life. In talking to our clients, dealers are caught short high yield cash bonds to customers and suddenly the market has gone bid, leaving the shorts scrambling. Emerging market currencies rallied as the “Euro-Carry Trade” (investors borrow in a very low rate currency, like the Euro, and invest in a higher yielding currency, like the Australian Dollar) is now alive and well. Even commodities, are putting in an impressive performance, after adjusting for the stronger dollar.

As I said in last week’s post, what is now driving risk markets is a tremendous amount of capital, no longer worried about The Fed, chasing any investment that doesn’t resemble a German two-year note yielding negative 32 basis points. The ECB’s guidance today that they will most likely be expanding their Quantitative Easing in December ensures, in my opinion, that the Fed will remain extraordinarily accommodative with monetary policy well into 2016.

I think the five-year U.S. Treasury Note can rally to a sub 1.20% yield (now 1.34%) as the market pushes the Fed out on the calendar. As I stated last week, if you’ve been holding back putting capital to work, or worried about going too far out on the yield curve in case of, “Taper Tantrum-Part 2,” stop worrying. I believe the ECB has just tied the Fed’s hands for a long time.

Member SIPC & FINRA. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor.

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