Posted Jan 15, 2018 by Martin Armstrong
Thanks for all your guidance and help in navigating these markets. You mention rates are going up soon in Europe but how can the ECB achieve this when they are still implementing QE. I work in the European HY market and the technicals are horrible as so much money is flooding in chasing yield driving up leverage and deteriorating lending conditions. If rates do go up soon can we expect a spectacular unwinding of the HY bond market that has ground so tight due to CSPP?
Thanks so much, keep up the amazing work.
ANSWER: Central banks can only control short-term rates for brief periods of time. They cannot control the long-end. The problem the ECB has is by backing off of QE, it will require private buyers to replace them, which will not happen at negative to low rates. The interest rates will be set by the private sector – not the ECB. The QE program has degenerated from an economic stimulus to simply life-support for member states. The “stimulus” never made it past the governments and we have nearly 10 years of QE that has just failed completely. Once the government have to turn back to private buyers, that is when you will see rates rise sharply to try to sell new debt.