Eurozone May Have Turned Corner
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
In a surprising statement on Thursday, European Central Bank President Mario Draghi appeared to be calling the eurozone’s quantitative easing program a success even before it begins this coming Monday. It’s been roughly six weeks since the quantitative easing program was passed, and in that time there appears to be evidence that the eurozone economy has turned a corner. Even with the risks emanating from Greece and other struggling European nations, ECB economists are beginning to believe that 1.5 percent economic growth is achievable for the current year, with gains of 1.6 and 2.1 percent in 2016 and 2017 respectively. The economists are also forecasting inflation to rise from its current rate of zero to just shy of 2 percent by 2017.
According to Draghi, due to the announcement of the stimulus program, “borrowing conditions for firms and households have improved considerably.” In other words, long-term interest rates and corporate lending rates have fallen even before the quantitative easing program has started. The eurozone central bank will buy €60 billion of debt per month starting Monday through September 2016 or a total of €850 billion in government bonds.
The top-performing bonds here in the U.S. this week are mortgage-backed bonds with the Barclays U.S. Mortgage Backed Securities index gaining 0.04 percent over the past five trading days. Following the financial crisis in 2008, mortgage backed securities were on many investors’ do-not-buy lists. However, due to improving stability in the real estate market and stricter lending standards, mortgage-backed securities have regained their popularity.
By now, most homeowners have had the experience of borrowing money to buy a home from one lending institution, only to be notified a few months later that their loan has been sold to another finance company. Some entities that buy large numbers of mortgages, bundle them together and sell them as an investment known as mortgage-backed securities. Most mortgage-backed securities offer slightly higher yields than U.S. Treasuries, but run the risk of getting the principal back early should interest rates fall and the homeowner decide to refinance at a lower rate.
All investments have risk under the right (or wrong) circumstances. Mortgage-backed securities were hit hard during the financial crisis, as some Americans walked away from their homes, and their mortgages, due either to a loss of employment or to declining real estate values.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.