Why ECB Tapering Could Prompt a Change in Bond-Market Philosophy

Speculation had been rife that the European Central Bank might have used its September Governing Council meeting to signal the start of tapering for its quantitative easing program. That confirmation didn’t come, switching attention to the October 26 meeting. Here, Franklin Templeton Fixed Income Group’s Head of European Fixed Income, David Zahn, explains how he thinks markets will react once the announcement is made and how it could lead to a change in bond-market philosophy.

Markets had been on tenterhooks ahead of the September meeting of the European Central Bank’s (ECB) Governing Council. They were anxious to see whether ECB President Mario Draghi would confirm what most observers, including us, already expect: eurozone quantitative easing (QE) would begin tapering in 2018.

In the end there was no specific guidance on tapering, which leads us to believe that an announcement will be made at the October 26 meeting. After that date, there is only one more scheduled meeting before the QE program is scheduled to end, and the ECB has generally tended to flag its intentions well in advance.

In general we’d expect bond markets to be quite relaxed with this outcome.

We know tapering is eventually coming, but don’t yet know the scale or timetable, so absent any details, we don’t expect bonds to move that much in the aftermath of Thursday’s meeting.

While we think it would be better to confirm sooner that tapering will begin in 2018 because markets are set up for it, in reality there’s no rush for the ECB to announce its tapering plans.