As we reported moments ago, Mario Draghi just unleashed another "whatever it takes" speech, this time focusing on the ECB's fight with the "deflation monster" and explaining how the central bank plans to boost inflation and inflation expectations, saying that "while inflation will remain low for a prolonged period, we see it gradually rising back to 2%. The delay is largely explained by the impairments in the transmission mechanism that lengthen the lag between our accommodative policy stance and price developments."
And while the initial EUR response was as expected, dropping about 30 pips (but already rebounding on concerns that the Draghi bazooka may truly be empty this time - after all what else can he surprise with as CA's Valentin Marinov said [7]), German Bunds, especially the short-end, were quick to give Mario Draghi the middle finger and the 2Y has dropped to a quite deflationary all time record low of -0.389%, because all they heard was that the ECB will monetize even more debt.
[8]
And a longer view:
[9]
However, as a reminder, the ECB has a monetization floor: recall [10]"purchases of nominal marketable debt instruments at a negative yield to maturity are permissible as long as the yield is above the deposit facility rate."
In fact, based on recent calculations some 30-40% of the entire German curve is now trading with too negative yields to be eligible for the ECB's current formulation of QE, and we don't have to remind readers that the biggest risk the ECB's QE faces is running out of eligible securities it can purchase. The private market is scarce enough as is, and explains why Europe is desperate to find politically correct ways to issue much more debt (hint: refugee crisis).
In effect what the German short end is saying is that not only will the ECB slash the deposit rate, from -0.20% to as low as -0.40% or more, but that another massive wave of QE will be unleashed. What this means, of course, is that the ECB will also unleashe another massive deflation-exporting tsunami, which in turn will force not only Japan and China, but soon, the Fed as well, to respond in kind and expand their own "unconventional monetary policy measures" because in the race to the bottom, all that matters is if just one central bank is doing it.
Finally, as for Draghi's contention that more negative rates will stop savers from hoarding money at the bank, he is as usual, completely wrong: as the actual data shows [11], what happens is that the lower the deposit rate across Switzerland, Denmark and Sweden, the greater the eagerenss of savers to, well, save instead of spend.
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