Something changed yesterday.
The ECB came out at their scheduled policy meeting and did the somewhat expected - they left overnight rates unchanged. All was good for the first hour after the announcement...then all hell broke lose.
The ECB has had a program of very unconventional Quantitative Easing (QE) in place for some time where they have been buying $80bln Euros per month of all kinds of corporate bonds from the banks/dealers on the street. This current program of QE continues until Mar 2017. Who knows what happens to it beyond then?
So what they didn't say was, what will happen after Mar 2017. their comments, or lack thereof, were all of a sudden taken as somewhat bearish, certainly for global bonds. I think the market was looking for a stronger signal that the QE program would continue beyond Mar 2017, and maybe even be expanded.
What we are seeing here is a peak in Central Bank (ECB and the Fed) liquidity for the global market place. And one thing we know is that equity markets have largely risen on central bank liquidity...how else do you explain it when we are coming on our 6th consecutive quarter of negative corporate earnings in the S+P and stocks are at all-time highs?
Here are two charts: first is the ECB's balance sheet vs the DAX (German Stock Market) and the second is the Fed's balance sheet vs the S+P. Note two things: 1) the ECB was reluctant/slow to use QE after the credit crisis and 2) how the two major stock indices in each zone have followed the central bank balance sheets higher.
Also note, in the case of the Fed's balance sheet and the S+P, (I have shown this chart before), is that the S+P hasn't done a ton over the past two years, other than create some sleepless nights for investors. Funny how the Fed's balance sheet hasn't expanded for two years either, eh?
So the things that have changed are:
We are adjusting our portfolios accordingly. To be sure, there will come a time again when bonds will provide a Flight to Quality (FTQ) bid for safety but I don't think it is right now. First we need to move off of this correlation to risk assets at 1:1.