Environment set for Mario Draghi to get full-blown QE over the line…..

Global equity markets moved sharply lower last week, core government bonds were in demand and volatility jumped. Government bond yields in the Eurozone moved to new record lows. The German 10-Year government bond yield closed the week at 0.64%, while the yields on German bonds with a maturity of four years or less are all in negative territory.

While the slide in the price of oil continues to show little sign of letting up, adding to the unease among investors was the political uncertainty in Greece, weak economic data from China and a lower than expected take-up of cheap funding by European banks under the ECB’s TLTRO programme (4 year loans at 0.15%).

The lower than expected take-up of cheap funding under the ECB’s TLTRO facility  and the repayment of existing LTRO loans further strengthens the argument for additional measures from the ECB, if they “intend” to increase their balance sheet by c. €1 trillion. While Draghi has argued for years that Europe is not turning Japanese, in terms of a deflationary spiral, the performance of European government bonds would suggest that the battle is being lost against deflation.