By ETF Heat Map Team

European bonds may be full of surprises in the coming few months. The market is full of expectations whether the European Central Bank will continue to extend monetary or not despite economists questioning the effectiveness of quantitative easing during the current global market conditions. However, according to JPMorgan an end to quantitative easing (QE) is seen and such a scenario should be openly considered.

Given the direction ECB may take with include entering or exiting certain ETFs previewed below. As such, some ETFs from our ETF Heat Map database worth considering include the following:

  • VGK – Vanguard FTSE Europe ETF
  • IEV – iShares Europe ETF
  • IBCX – iShares Euro Corporate Bond Large Cap UCITS ETF
  • IFEU – iShares Europe Developed Real Estate ETF

Pound Euro DollarQuantitative easing is unconventional in nature, but helps the European Central Bank in expanding the money supply and lowering the interest rates in the attempts to stimulate lending, investment and the economy.  The European Central Bank’s quantitative easing program has been aggressive in bond buying for the past 18 months, with almost $1 trillion of bond purchases. The program has been in limelight since January 2015 in an effort to boast growth and inflation across the Eurozone. However, the current ECB inflation target of 2 percent compared to the actual 0.2 percent has raised concerns amongst economists over the suitability of quantitative easing method and the ECB’s ability to forecast appropriately. Perhaps it is not the ECB’s fault that current market conditions sometimes appear counter intuitive; however, the ECB and also the BOJ should take caution from the QE initiatives and the results obtained by the U.S. Federal Reserve previously.

The policy makers are due to meet on Thursday to discuss whether the QE program should be extended beyond March 2017, or to wait till late 2016 to foresee the impact of Brexit to the European economies.

John Normand, head of foreign-exchange, commodities and international rates research at JP Morgan, believes that the ECB has reached its limit for quantitative easing, and warned investors to position for a correction in bond yields and rethink of current ECB policy.

Mr. Normand further recommended that investors cut overweight positions in the bonds of Europe’s peripheral nations. He predicted that the spread of benchmark debts to widen as much as a percentage point, and to buy so-called curve “steepeners” which would profit if longer-dated bond yields climbed by more than those on shorter-term debt.

On the contrary, for most economists the trend of quantitative easing may not be over. According to a Bloomberg survey, almost half of participants foresaw an expansion to monetary stimulus on ECB’s meeting on Thursday, with others predicting an expansion in either the October or the December meeting.

Spanish bonds have shown to advance compared to German bonds, which halted their decline on Friday suggesting the lost momentum in the euro-area economy, which was largely due to slow down in Germany.  This was a reaction of the surveys published on Monday.

Lower interest rates and excessive bond purchases have suppressed debt yields in the region. The yield of 10-years bonds fell below zero and into negative territory for the first time in June. However, according to Bloomberg’s forecast the yield will rise to zero percent by the end of this year.

The lower yield in the region may avert investors away from the bond market. On the tops of lower bond yields, the uncertainty engulfing the market with regards to the short term vs long term impact of quantitative easing by the European Central Bank and the potential strength of the Euro will warrant its own responses by the investors. Investors should reconsider their stance on corporate debt versus sovereign debt.


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