Volatility - an indication of what went wrong in the QE something

Marcello Minenna, professor at Milan's Bocconi University, argues that the QE program is developing not quite as originally planned. His opinion was published today on The Wall Street Journal.

"President of the ECB,
Mario Draghi, warned last week,
that "we have to get used to the periods
high volatility. " The yield on the
10-year German bonds jumped
1%, crowning period of two months, during
during which investors watched
very rapid and unexpected jumps in prices
Bond (in different directions).

but Mr.
Draghi was silent about something in his
comments. He explained a new era
increased volatility in the background is extremely
low interest rates natural
forces. ECB President explains
almost no weather conditions that
It is beyond human
control capabilities. It's not only
downplays the ECB responsible for
bringing down the interest rate to nearly
zero, but also ignores the fact that
it is the last monetary program
controller directly contributed
such a sharp increase in volatility.

The main reason
yield fluctuations that began
in April, is simple: traders try
buy low and sell - it's expensive.
The price of bonds fell and yields
rose as investors who
We took advantage of the rise in bond prices
after the announcement of the ECB's large-scale purchases
sovereign debt securities now
They are trying to fix their profits.
This strategy (which has a centuries-old
tradition) interacts with features
QE program, officially
launched in March.

Additional
gosbondy demand as a result of QE
accelerated the decline in yield of
Eurozone bonds. As a result, many
all of them have gone into negative
territory. In April, yield
nine-year German bonds
slid below zero, taking the
even short-term bonds. for the first time
Throughout its history, the same Italian
six-month securities reached zero
profitability. By mid-April the total
the value of debt securities in the euro area
It reached 2.8 trillion euros, a quarter
of them had a negative return.

all trips
about the fact that, in accordance with the rules
ECB set for the QE program,
you can not buy in the secondary market
bonds with a yield of less than 0.2%.
Accordingly, the approach of the debt
paper to yield 0.2% - this is a signal for
trader that it is time to sell it,
because its price will not grow after
it would be unsuitable for participation
in the QE program. Respectively,
from that moment on banks and other investors
begin to create an excess supply
bonds, trying to fix their
profit.

recent fluctuations
prices of German bonds to a large
extent it is this and explained. it
no coincidence: in fact on QE program
ECB buys more and more
bonds. As a result, even a long-term
Bonds are suitable for threatening
Border yield of 0.2%. Similar
dynamics is observed in the sovereign markets
bonds and other euro zone countries, although
where volatility is less pronounced:
negative profitability there is still
not so big spread.

these fluctuations
prices strengthened further and other
QE programs and features
total control policy. For example,
reduced trading volumes, and after them,
- and liquidity. In particular, national
Eurozone central banks accumulate
emergency stocks of public debt.

In the same time,
Private banks are scaling back their
traditional activities as
market maker, because they interfere with
tightening the rules regarding their
capital base. Less paper circulates
in the markets, and the standard trade
strategies may cause significant
price fluctuations.

Consequently,
the nominal value of the sovereign
Eurozone bonds with a negative
yield fell to € 1.3 trillion
a result of the flash crash in April and June.
This autoimmune reaction participants
market on the likely deficit bonds,
held under the rules of QE.
Investors expect that the situation with
liquidity in the best case will remain
at current levels, and may get worse.
Seeing how quickly jump at such prices
politics, some investors reluctant
held at sovereign debt securities
Eurozone - and most simply sells
them when the first hint of trouble.

In the longer term
term, QE will turn
a game of hide and seek between the banks and the ECB.
Regulators will provide money
funds in exchange for government bonds, pushing
prices up to dizzying heights. banks
at the same rate will sell
its assets, preventing reduction in yield.
They are well-equipped to play
these games. At the right moment they will
central banks to sell their large
holdings of sovereign bonds, and in the period
convenient price, they will always be able to use
cash provided by
regulators to buy gosbondy
back in even greater numbers.

even though
a high short-term volatility,
for banks is a very good bargain.
Based on a comparison of average balance
the cost of government bonds in the commercial
banks with an average price at which they
sold by national regulators
in the course of QE, profits already
resulting in the end of the game, already
estimated by some experts
approximately 12 billion euros.

But if banks
pleasure incremented their capital
on a regular basis as a result of
QE program, they are unlikely
We tend to engage in risky
credit schemes of individuals and businesses
- But economists initially
We are counting on the stimulation of these
sectors. This helps explain why
after three years of recession reduction
the volume of bank lending
slowed only very little, and
Now turn to growth is not observed.

recently,
while volatility in the bond markets
- is the result of an error in the program QE,
and not "highlight", in which Mario
Draghi wants so much to make you believe
markets. Instead of the implant
scheme, the ECB should be urgently start
work on its revision - of course,
if it is to have any hope
to achieve its objectives to combat deflation."

Marcello Minenna, specifically for The Wall Street Journal. Retelling - Anomalia

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