“One topic will dominate the ECB meeting and press conference next week: the global bond market sell-off, and what the ECB intends to do about it.
“The average Eurozone 10-year bond yield has risen about 30 basis points since late last year. While this is much smaller than the sell-off in the US, it is an unwelcome development this early in the economic recovery. We’ve already been treated to a barrage of ECB “jawboning” as successive Governing Council members have verbally pushed back against the move in bond yields. Investors should expect more of the same at the ECB press conference – and President Lagarde may go so far as to lay out the next steps the ECB could take to maintain favourable financing conditions, including increasing QE bond purchases.
“Meanwhile, the ECB will also publish its latest staff macroeconomic projections, which will show a sharp run-up in inflation in the very near-term, but a subsequent decline such that the central bank will miss its inflation target in 2022 and 2023. This inflation profile will support the ECB’s accommodative policy stance, and could provide it the cover for further stimulus further down the road. For investors, this means that Eurozone bond yields may remain well-anchored, even if they keep rising in the US.”