ECB announces cuts to bond-buying program: Why did markets stay calm?

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Consulting Director Todd LaFountaine discussed the European Central Bank (ECB)’s recent announcement on changes to its bond-buying program.

Draghi details scale-back of European economic stimulus program

The bank announced Oct. 26 that it will cut the amount of monthly bonds it purchases in half, Ristuben said—from 60 billion to 30 billion euros. However, ECB President Mario Draghi also stated that the program won't be ending any time soon. “In sum, the bank may be purchasing fewer bonds each month, but they’re going to do it longer than originally planned,” Ristuben explained.

Reaction from financial markets was muted, Ristuben said—in part because the announcement was expected, but also probably because Draghi chose his words carefully. “He likely sidestepped calling this a taper to avoid spooking markets, given how jittery they’ve been in the past on the subject,” Ristuben remarked—“but make no mistake, it’s a taper by any other name.” He added that, in his viewpoint, the ECB is cutting back on the program due to the overall health of the European economy.

U.S. economy shrugs off storms, grows at 3% clip 

Shifting to the U.S., Ristuben called the country’s gross domestic product (GDP) growth rate for the third quarter—which came in at 3%, per data from the Commerce Department—very impressive and a really solid number. “It’s higher than most analysts expected,” he noted, “especially when you factor in the hurricane disruptions in September.” In his mind, increased spending by both businesses and consumers, as well as strong export sales, all contributed to the solid growth. “This is great news for broader financial markets,” he concluded, “as it shows a globally synchronized economic expansion is underway.”

Treasury yields rise—What might it mean for the bond market?

Turning to bonds, Ristuben said that yields on the 10-year U.S. Treasury note surpassed 2.4% on Oct. 26, leading some investors to wonder if this is the beginning of the end for the bond bull market, both in the U.S. and globally. While Ristuben and the team of Russell Investments strategists believe a collapse is possible, he emphasized that it’s nowhere near what they see as the most likely outcome. In his and other strategists’ viewpoints, inflation has been too low to envision conditions changing dramatically enough for a spike in interest rates, which would cause prices to tumble.

“At Russell Investments, we do believe there is upward pressure on the 10-year Treasury,” Ristuben said—“in 12 months, we expect yields to be around 2.7%.” That said, he has a hard time seeing yields climb north of 3%. “Ultimately,” Ristuben concluded, “I don’t think devastation is around the corner for the bond market.”

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