Grad-EU-ation Day

Image source: New Africa - Shutterstock

What's going on?

The European Central Bank (ECB) announced on Thursday that it’s planning to slow down its bond-buying program, as the region proves it’s just about ready to stand on its own two feet.

What does this mean?

Central banks around the world rolled out measures to help keep pandemic-driven economic disaster at bay last year, and the ECB was no different: it’s been buying roughly $95 billion worth of bonds every month ever since. Now, though, the region’s economy is well and truly in full swing, growing by a better-than-expected 2.2% last quarter versus the quarter before. That puts it on track to reach pre-pandemic levels by the end of the year, so now seems like as good a time as any to take off the training wheels…

Why should I care?

The bigger picture: The EU’s not out of the woods yet.
The ECB was quick to point out that it wouldn’t withdraw support fully any time soon – until March 2022, at least. That might not be such a bad idea: European manufacturers are still trying to deal with blocked up supply chains and the higher costs that come with them, while the recent spike in coronavirus cases is threatening to knock the region’s recovery off balance.

For markets: High risk, no reward.
The ECB’s bond-buying program might’ve kept Europe’s economy afloat over the past year, but it’s also driven the region’s bond yields to record lows. Even junk bonds – debt issued by companies most at risk of not paying it back – are now paying out less in interest than the inflation rate. In other words, investors are actually losing money on them for the first time ever, even though their higher risk is usually offset by bigger payouts. Then again, there aren’t exactly many better options in the bond market these days…

Originally posted as part of the Finimize daily email.

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