ECB Opens Spigot on Bond-Buying Program

by Bryan Perry | September 7, 2012 8:47 am

European Central Bank President Mario Draghi announced that the ECB will embark on unlimited purchases of government debt[1] to put a floor under a shaky sovereign bond market. To ‘sterilize’ the bond purchases, the ECB will remove the same amount of money it spends from elsewhere in the system.

Under the “Money Outright Transactions” blueprint, the ECB would refrain from setting a public cap on yields and focus only on open market purchases of short-dated government bonds with maturities of up to three years.

Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to take back control of interest rates in the fragmented euro-area economy and to ensure the survival of the common currency. Policy makers are endorsing the plan and Draghi will lay out more details of the conditions as they become available. My guess is that he wouldn’t have announced this program without some kind of behind-the-scenes agreement by EU insiders.

On the news, the euro rallied to 1.26 to the dollar and Spanish 10-year bond yields fell  to 6.41%, both of which are, in my view, the program’s primary targets of stability. This is the first real action taken by the ECB following weeks of rhetoric in which global markets had put in a pre-emptive rally. I think that there will be some follow-on bullishness, but much of this news is already baked in the cake.

Within the domestic economic calendar, ISM Services came in at a better-than-expected 53.7 versus 52.4 consensus; initial jobless claims filed came in at 365,000 versus 373,000 consensus and the ADP (NYSE:ADP[2]) Employment Change showed a jump of 201,000 jobs in the private sector versus forecasts of 150,000.

They‘re all good numbers that fueled a 200-point rally for the Dow in Thursday’s trading session[3]. This morning we’ll get all of the employment data released by the Department of Labor; economists are calling for an increase of 140,000 in Non-Farm Payrolls as the unemployment rate ticks up to 8.3%.

The price of crude is popping back up toward $100 per barrel, now up $2.00 today to $97.40 as weekly inventories unexpectedly fell by 7.4 million barrels. Other commodities that Cash Machine invests in (namely grains and gold) are also seeing prices push higher as the drought carries into the fall and the trifecta of central bank printing of dollars, and both the euro and yuan getting priced into the precious metals markets.

All three forms of inflation are hitting investors at once, so it’s crucial to maintain a hedge against higher energy prices, higher food prices and higher interest rates. Even though GDP growth is anemic, inflation in its many forms is rearing its ugly head.

  1. embark on unlimited purchases of government debt:
  2. ADP:
  3. Thursday’s trading session:

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