European Central Bank vice-president Vitor Constancio told CNBC on Wednesday that a possible revival of reflationary pressures in the U.S. could spillover throughout Europe and spark a volatile reaction in bond prices.
Constancio pointed to the sudden surge in bond yields after November's U.S. election as evidence of the potential turbulence that could envelop some euro zone sovereigns. "That is the risk… it is the materialization of this reflation narrative," he said Wednesday.
The reflation trade refers to stocks that could stand to benefit from higher inflation and yields. Investors and traders had been betting on rising inflation under Donald Trump's presidency after he pledged to enact an agenda that included lower corporate taxes and infrastructure spending.
While Constancio admitted a "Trump rally" currently appeared less likely than in January, he was careful not to undermine the significance of an economic recovery, particularly in Europe.
"What is still ongoing is an economic recovery which is not so buoyant as markets thought some time ago but it is, nevertheless, a recovery," he added.