The European Central Bank has wide scale quantitative easing on the cards which by definition is inflationary. Expansionary monetary policy is expected to indirectly impact price inflation by expanding credit in the capital markets, thereby increasing the money supply and reducing the value of money. This should in turn, generate spending and facilitate price inflation. At the same time, the ECB has locked itself into exceptionally low interest rates meaning bond prices are rising. From a fixed income investment perspective, a rise in bond prices means a drop in yields; which is the main source of return for investors. However, from an option trading perspective, a price differential is the criteria for investment; hence with QE underway, bond prices will likely continue to rise. Clearly, this represents investment opportunities in the German 10 year bond.
Investors Notes:
- The start of the ECB’s stimulus program has pushed all bond yields lower, as German 10 year yield dropped to another record low of 0.187%.
- Banks in the Eurozone were buying up German debt recently which further drove down yields.
- Many long term German bond yields have moved to negative territory with the 9 year bond yield coming closer to a negative yield.
- Banc De Binary Analysts predict that bond prices will continue to rise, indicating a potential upward movement in German 10 year bond option contracts.