Doubts over Draghi’s ECB bond-buying policy

Poor Mario Draghi. The ECB is spending €80 billion a month pumping cash into the euro zone economy by buying bonds.

At his press conference on Thursday he signalled that this would continue full steam ahead, said key ECB committees were looking at how it worked and kept up the line that it could continue past next March, if needed.

On Thursday, the NTMA auctioned €1 billion of 10-year bonds at an interest rate of just 0.33 per cent. On Friday, the same bonds were trading at 0.46 per cent. Those who bought from the NTMA may be feeling a little sore, but that’s life. Call it good luck of good judgment, but it shows just how tricky markets are at the moment.

Of course interest rates are still ridiculously low. German 10-year bond yields have been in negative territory – meaning investors were guaranteed a loss if they held the bonds to maturity.

On Friday, they crept into positive territory, with a yield of 0.004 per cent, nearly as high as the rate the European Commission claimed Apple was paying in tax. On any criteria this is still extraordinary. But the question is are we looking at some kind of turning point?

In the United States, a string of senior Fed voices have been out suggesting that an interest rate rise there in September remains possible. Analysts are still trying to work out whether this is preparing the way for a rise, or whether the Fed, like the rest of us, doesn't know what it should do.

The dilemma facing Draghi is even more acute. Falling share prices and falling bond prices do not usually go together.

They signal a real questioning of whether the ECB policy is enough to revive the euro zone economy.

The trouble for Draghi is that ECB politics – and the opposition of Germany, may stop him doing much more.

And when interest rates are zero and your are spending €80 billion a month buying bonds, there may not be a lot more you can do.