Weekend Economists Commemorate the Dark Knight July 25-27, 2014

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24. Draghi Safety Net Becomes Blindfold to Risk as Bonds Soar

http://www.bloomberg.com/news/2014-07-25/draghi-safety-net-becomes-blindfold-to-risk-as-bonds-soar.html

Two years since European Central Bank President Mario Draghi’s historic promise to defend his currency bloc, there are signs bond investors are growing too complacent under his protection.

While Draghi’s pledge, backed up with unprecedented policy action, held the euro region together, recent price moves suggest it also immunized investors against risk. The average yield on bonds from Europe’s most-indebted nations touched a record low yesterday, even after the downing of a passenger plane over Ukraine, an escalation of conflict in Gaza and financial woes at Portugal’s Espirito Santo Group.

“It’s been an exercise in central banks desensitizing markets,” Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London, said in a July 23 phone interview. “It’s a dictated complacency because globally there is a huge amount of liquidity. Everyone views everything as a localized problem.”

Bond markets show Draghi’s July 26, 2012 pledge to do “whatever it takes” to protect the euro was the turning point in the region’s debt crisis. The day before the message, delivered in a speech in London, Spanish 10-year (GSPT10YR) bond yields had surged to a euro-era record 7.751 percent, above the 7 percent level that pushed the Greek, Irish and Portuguese governments to seek international aid.