Jean-Claude Trichet, president of the European Central Bank (ECB), announced today that rates have been cut 25-basis points to 1%, the lowest rate in the bank’s 10-year history.
Most leaders don’t think the rate should fall below 1%, as other major economies (read the United States, England and Japan) have done. While the Bank of England just held rates at 0.5%, Trichet has not ruled out more cuts.
In the meantime, though, the ECB unanimously agreed on a plan to buy $80.5 billion in euro-denominated covered bonds.
“Covered bonds, known as Pfandbriefe in Germany,” reports Bloomberg, “are secured by property loans or lending to public-sector institutions, and differ from mortgage-backed securities because they’re also supported by a borrower’s pledge to pay. They have traditionally been considered among the safest corporate bonds available, allowing lenders to pay less interest.”
This sector has been hit hard by the global financial crisis, and the euro region had about 1.5 trillion euros worth of covered bonds outstanding by the end of 2007. According to Bloomberg, BNP Paribas reported about 900 billion euros were German.
No surprise, then that Germany has been an opponent to the purchase of more bonds, which could lower the value of its outstanding bonds.
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That said, the euro jumped higher on the news against both the U.S. dollar and the Japanese yen.
Inflation in the euro region remains low, however, which is why Trichet has said he hasn’t ruled out more cuts, should they be needed.
The United States however, has puts its own back against the wall, keeping rates effectively at zero, and continuing to purchase bonds, which could mean inflation in the U.S. will be coming down the pipe in the future.
WaveStrength Options Weekly editor Adam Lass says, “The Fed claims that inflation is actually ‘below rates that best foster economic growth and price stability in the longer term,’ and plans to keep rates at or below zed for the foreseeable future. That’s their story and they are sticking to it.”
Not so fast, Adam says. “Taken a gander at 30-year T-Bonds lately? Last December, futures were hovering around 142 and change with yields under 2%. Now we were looking 122, a drop of some 14%, forcing yields to just about double.”
That means dollar-denominated assets – like oil and gold – will climb. Adam says you can look to the Energy Select Sector SPDR (XLE:NYSE), which still contains the world’s most profitable companies.
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