ECB Interest Rate Discussion

The euro is rallying to the highs of the day at $1.065 on the Bloomberg story that:

“ECB policy makers considered the question of whether interest rates could rise before their bond buying program comes to an end, according to people familiar with the matter.”

This was followed though with:

“The council didn’t discuss any specific scenario or timeline and hasn’t made any formal decisions on a strategy.”

We know the playbook the Fed took. Step 1, end QE. Step 2, slowly raise rates. The ECB though has a different situation as so much funding takes place via banks more so than the capital markets. The story is sending European sovereign yields to the highs of the day also . The 10 yr yield is now up 4.2 bps to .47% (the recent peak is .48%). Short end yields that are negative are the most vulnerable of course and the 2 yr note yield is higher by 2 bps to -.83%. Yields are negative out to 7 years in Germany and the 7 yr yield is higher by 5 bps to -.04.

This all said, it should surprise no one that they discussed it and this story doesn’t solve at all as to when negative interest rates may actually disappear. I’ll repeat again though, the ECB has created a monster in the European bond market and we are seeing early signs that the tree is beginning to shake.