All Ears On Draghi

Speculative bond traders see in Europe the opportunity to put the market back on track.

Traders have their ears glued to the press conference of Mario Draghi, president of the European Central Bank.

The ECB took no action, as expected, but traders are listening for Draghi to offer a hint of what might come in the months ahead. Ten minutes into what is usually a 45-minute press conference and no market-moving quotes. If there’s a big move in bonds later, you’ll know Draghi said something that traders liked of disliked.

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If Draghi does appear to be softening on his outlook for Europe, the U.S. 10-year note yield is positioned to break to the downside. Draghi first kicked up a storm three weeks ago when the 10-year was 2.13%. Chart traders believe a break below 2.26% today would send the yield on a quick ride back to that low of three weeks ago. Conversely, the yield could start a slow climb back to 2.40% if Draghi doesn’t deliver.

Obsessing over the ECB meeting might seem ridiculous, but speculative bond traders see it as a big opportunity to get the market back on track to lower yields. The U.S. Federal Reserve has its own meeting next week, but traders seem to believe the ECB holds the key to the bond market.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

July 20, 2017

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