World bond markets have stabilised after their worst bout of volatiilty since the eurozone debt crisis. Sonia Legg looks at why investors were caught off guard and what part the ECB's buying programme played in the turmoil.
Deflation and default - two of the words most dreaded by investors A Greek default is still a possibility - but deflation it seems may not be. Inflation pressures in the euro zone have risen, according to the one key indicator. It suggests the ECB's 1 trillion euro bond buying programme is working. But possibly not in the right way. Dominic Johnson, CEO of Somerset Capital management, fears it's a case of stagflation - where wages rise but productivity doesn't. (SOUNDBITE) (ENGLISH) CEO OF SOMERSET CAPITAL MANAGEMENT LLP, DOMINIC JOHNSON, SAYING: "I don't know if this is intended by the policymakers - I don't think it is particular welcome and I have always been sceptical about QE being a driver of betterment of society rather than as an emergency plaster." Bond markets recovered at the end of their most turbulent week in Europe for decades. Most government bond yields dropped back in early Friday trading. But the pounding of recent days - triggered by signs of a rebound in inflation - still left normally rock-solid German Bunds on course for a big weekly spike in yields. BGC's Mike Ingram says that's actually a good thing. (SOUNDBITE) (English) BGC MARKET ANALYST, MIKE INGRAM, SAYING: "Long-term bond yields at negative rates is a sign of economic failure. If you believe that long term these economic programmes by the ECB are going to be successful you should be seeing long-term yields rise and you should be happy about that because it means growth is on its way." But is it? Once again euro zone data offers a conflicting picture. Industrial output this time. In Spain in March it was up 1% from the previous month. Not so good in Italy - at just 0.4% - and down half a percent in Germany. Europe's largest economy may not be growing at the rate many expected. Combine that with the bond market movements and the ongoing crisis in Greece and a longer period of volatility could be on the way.