Europe’s Short Rate Remains Unchanged

The European Central Bank left its key rate unchanged at a record low of 0.25%.

There was speculation around whether the European Central Bank would cut rates again in response to the low level of inflation (0.7% in January). The central bank’s president, Mario Draghi, addressed the low inflation issue by saying that the measure of inflation would remain low over the upcoming months, but he would expect it to eventually rise back to the central bank’s target rate of just under 2%. Further, he was adamant that there is no deflation in Europe. He continued by explaining how the situation in Europe is not similar to Japan’s deflationary period, touching upon the finer points of Europe’s inflation and describing how the European economic recovery is advancing.

Year-to-date, the S&P Eurozone Sovereign Bond Index is returning 2.44%, just about the 2.46% it returned for all of 2013. Hidden within the broader index though is a number of country stories. Because this is a market weighted index, the return of the index will look more like its larger constituents (aka: Italy, France and Germany). Though if you were to look at the performance of each of the individual countries, it is quite evident that investors have regained confidence in the credit worthiness of the once troubled countries such as Ireland, Italy, Portugal, Slovenia and Spain.
Performance of the S&P Eurozone Sovereign Bond Index and its country sub-indices.

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