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Why Have European Bonds Been Jittery?

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European bonds got a jolt

In the past three to four days, you may have noticed that European bonds have seen their yields rise sharply. The graph below shows the movement in the ten-year German Bund yield. The primary reason for the spike was a report by Bloomberg referring to unnamed ECB (European Central Bank) officials that said that the central bank may be thinking about tapering its bond-buying program.

At present, the ECB is scheduled to continue buying bonds until March 2017 and can extend the program if it deems necessary.

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What did the officials say?

Bloomberg noted that “The European Central Bank will probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros ($11.2 billion) a month, according to euro-zone central-bank officials.”

The report added that according to the officials, policymakers have informally consented to tapering once they decide to end the program.

Analysis

In this series, we’ll analyze why this talk of tapering has come about and discuss the implications for investors. ETFs like the SPDR Barclays International Treasury Bond ETF (BWX) and the iShares International Treasury Bond ETF (IGOV) are impacted by sharp moves in government bond yields. Meanwhile, a general rise in interest rates could impact European banks like Deutsche (DB), Credit Suisse (CS), and Banco Santander (SAN) as well. Obviously, the developments have affected the US market as well (SPY).

In the next article, we’ll look closely at this development.

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