Lautenschlaeger’s Exit Removes QE Opponent for Bond Investors

(Bloomberg) -- Sabine Lautenschlaeger’s resignation from the board of the European Central Bank removes a hawkish policy maker for bond traders, after her opposition to more quantitative easing.

While market reaction Thursday to the surprise announcement was limited, investors are likely to see her exit as helping to clear the way for more policy easing measures in the future, according to strategists. That would provide support for the record-breaking rally in the region’s bonds this year.

“The reality for markets is that any replacement for Lautenschlaeger will have to be someone who agrees with current ECB policy,” said Peter Chatwell, European rates strategist at Mizuho International Plc. “Resigning in opposition to ECB measures is much more of a political act than anything else, as once out of the ECB one’s effective influence is close to zero.”

European bonds have surged this year with yields dropping to record lows as the ECB steps up the fight against a slowing economy and investors seek a safe harbor from growing trade conflicts. While the central bank gave no reason for Lautenschlaeger’s resignation, it highlights unprecedented divisions over President Mario Draghi’s plan to resume asset purchases from November.

Lautenschlaeger, the only woman in the ECB’s Governing Council, resigned more than two years before her term ends. She voiced opposition to a fresh round of bond buying last month, saying that it was unnecessary and should only be used as a last resort. About a third of the 25 members took the same line.

Germany’s Finance Ministry said the government will nominate a “suitable candidate” as a replacement for the 55-year-old. As the largest member state of the euro area, Germany has a right to a seat on the ECB board, it said.

Since the ECB’s last meeting on Sept. 12, the euro-area economy has showed further signs that it may be headed toward a recession, with German manufacturing dropping to the lowest level since the financial crisis and the slowdown spreading into services. However for Rabobank International, Lautenschlaeger is likely to be replaced by another German with a similar view on easing.

“In terms of the impact for markets, this simply removes one known and audible hawk from the board,” said Matthew Cairns, a rates strategist at Rabobank. “The announcement for additional QE has been made and the path to additional balance sheet expansion, which Lautenschlaeger was vehemently against, is now in motion, so Lautenschlaeger’s resignation will have little material impact on sentiment.”

German 10-year yields dropped two basis points to -0.59% Thursday, having touched a record low of -0.74% earlier this month. European investment-grade bonds have returned investors 8.5% this year, according to a Bloomberg Barclays index. Germany’s yield curve has flattened close to the lowest level since the financial crisis on the prospect of fresh QE, with the 30-year premium over five-year bonds at around 65 basis points.

Investors are already contending with a number of changes at the ECB, with Draghi due to be replaced with the former head of the International Monetary Fund Christine Lagarde, who is expected to call for more spending by governments. Benoit Coeure, another opponent of new QE, is expected to be replaced by Italian central banker Fabio Panetta.

“HR dynamics are also supportive” for bonds, wrote Commerzbank AG strategists Michael Leister and Cem Keltek. “Key dissenter Coeure will be replaced by Fabio Panetta on the Executive Board on January 1, and he should have much less reservations regarding QE.”

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, William Shaw

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