Recent comments by several ECB governors have fueled speculation that the bank might ease further at its upcoming meeting on April 3. While the Eurozone is slowly recovering, unemployment remains elevated and concerns are mounting over deflation. Near-zero interest rates limit the ECB’s options, leading some analysts to believe a more extreme step, such as outright quantitative easing, may be in the cards. While this can’t be ruled out, the implications for investors are more nuanced given the huge rally in sovereign bonds and riskier assets.

Since the depths of the Eurozone crisis in the summer of 2012, yields on peripheral sovereign bonds and riskier credit instruments have plunged. European equities have also been ascendant, rallying over 40% since their lows. This recovery has been accomplished with surprisingly little action by the ECB other than verbal assurances; in fact, the ECB’s balance sheet has contracted in recent quarters while those of peers have continued to expand. The ECB’s problem is that the rally across asset classes has not entirely been driven by local investors; massive inflows of offshore capital have boosted the value of the euro—and may ironically be curbing the region’s economic recovery.

How should investors think about the ECB’s options given the current environment? The ECB may be less concerned about disinflation than some believe, as it is a necessary side effect of the wage cuts and layoffs occurring across the region. While these have in turn lowered employment and consumption, they are also boosting competitiveness and reducing imbalances, not to mention helping keep government deficits in check. Despite recent muted inflation, the ECB likely also takes some comfort from the fact that expectations of inflation (as measured by forward inflation swaps) have actually changed very little over the past couple of years.

This is not to say the ECB will sit idle, and several things are worth watching in the months ahead. If it is capital flows that have supported the euro, this effect could fade given that the best performance (especially for sovereign bonds) is likely behind us. If the euro maintains its recent strength and creates strains for the “real economy,” the ECB could even go as far as QE. However, the bar for outright purchases of sovereign bonds is likely higher than is assumed, and the fact that such purchases would likely have to be evenly distributed (across geographies lest the ECB be accused of attempting to finance a specific country’s deficit) could reduce their effectiveness. Should expectations of deflation become more entrenched, more drastic action could be seen.

Supply and pricing for credit should also be monitored. Sovereign bond yields have plunged and subsequently helped lower loan pricing, though the process is not complete. However, credit demand is anemic (despite banks easing loan standards) as consumer and business confidence are weak. Should demand for credit rise and supply fail to respond, pushing up yields, the ECB could consider outright purchases of credit instruments. It could also offer negative rates on overnight deposits by European banks, though this may have undesirable side effects and conflict with its desire to encourage bank sector deleveraging. Low yields and deleveraging pressures also reduce the likelihood of another round of long-term repurchase operations for banks, as previous attempts simply funded a carry trade where banks bought sovereign bonds.

What should investors do? Probably very little. The juice has been sucked from the fruit of the sovereign bond rally, and we don’t expect significant gains from here even under a more dovish ECB. Further, upside is capped for investment-grade credit, though so too may be downside given an effective ECB backstop. Higher-beta credit is relatively more attractive, especially as it might be a primary beneficiary should the ECB expand the scope of its asset purchases or specifically target blocked peripheral credit channels.

We continue to think that relative valuations (and potential operational leverage) as well as ongoing dovish policy are most positive for equities. This said, we do want to bang the drum that non-euro investors should hedge currency exposures. Doing so will align them with the ECB and also cushion downside if flows or fundamentals cause the currency to weaken.

Wade O’Brien is a Senior Investment Director on the Cambridge Associates Global Investment Research team.