How to Keep Your Income Afloat as the ECB Tapers

The ECB has begun its big retreat from bond buying. It’s deftly managed to avert a taper tantrum in regional bond markets, which suggests they’ll stay an attractive place for income-seeking investors to drop anchor.

In the couple of years it’s been in place, the European Central Bank (ECB)’s bond buying program has touched most corners of the region’s bond markets. It’s resulted in low to negative yields in the safest bonds, compressed spreads across the euro-area’s different government bond markets, tighter credit spreads and a general flattening of regional yield curves.

As it’s grown clearer that the ECB was gearing up to phase out quantitative easing (QE), there were concerns that tapering might trigger an unruly reversal of QE-driven dynamics.

Now that the ECB has unveiled its tapering plans, their very slow and gradual pace—and the fact that they don’t have a definitive end-date—are buoying up bond markets.

As market dynamics shift, some bonds will fare better than others. We think income-seeking investors can stay comfortably afloat—provided they can actively navigate credit sectors and ratings.

What’s Keeping Credit Afloat?

The QE program and negative interest rates encouraged investors to move their money out of the region’s safest government bonds and into higher-yielding assets. This has ensured that demand for regional credit has comfortably outstripped the available supply. This important technical support will stay in place as QE tapers. And, with the ECB signalling that interest rates won’t rise any time soon, cash will remain an unattractive investment.