19 April 2021 | Building for resilience
As we go into the summer the US economy should be largely opened while the European economies are lagging and only starting to open. As these economies recover, the debate about tapering bond purchases will gain momentum, leading to some bouts of volatility in the markets.
In the United States, that means determining when taper will start and how it will happen . The odds are that in September, we will know the path for tapering. In Europe, it means in part replacing the Covid-19 PEPP program fully or partly by the standard APP program which is far less generous to the European periphery (e.g. Italy, Greece). Given how low sovereign yields are and in particular break-even inflation, the potential for a repricing of European yields higher is significant. Faced with this, the ECB is likely to adopt a predictable incremental approach to tapering most likely also in September. The market will probably speculate on tapering in August because liquidity then is typically poor as traders head for vacation.
What does it mean?
To paraphrase a Roman general, in times of peace prepare for war. Low duration Covered Bond offer a partial hedge in case of a temporary consolidation in the financial markets, with August being a prime suspect.
