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Rising bond yields test ECB nerves before shrinking decision


Borrowing costs for eurozone governments are rising again, testing the nerves of policymakers at the European Central Bank before deciding to slow down asset purchases from next month.

If the ECB cuts its recent bond purchases to € 80 billion a month at its next Governing Council meeting on June 10, it will join other central banks, which have already done so in response to better economic forecasts. including Canada and the United Kingdom.

US Federal Reserve officials have was discussed At the meeting on April 30, will there be talk of easing bond purchases?

However, the recent rise in bond yields underscores how cautious the ECB will be when it backs down its emergency stimulus efforts if it is to avoid unwanted increases in financing costs for some of the bloc’s weak economies.

In response to the ECB’s slowdown in bond purchases on Friday, its chairman, Christine Lagarde, said it was “too early, there is no need to discuss longer-term issues.”

“I have said many times that policymakers need to provide the right bridge to the epidemic in the recovery process so that we can actually fulfill our mandate, that is what we will do,” Lagarde added.

Returning the stimulus after a price is a balancing act. Do it very quickly և it can affect investors, putting the recovery at risk. But do it too slowly և the economy may overheat, making further tightening of policies more painful.

“It’s a miracle,” said Paul Diggle, chief economist at Aberdeen Standard Investments. “If Lagarde can manage communication very promisingly, maybe he can avoid calling it a boost to sales.”

The more conservative “hawks” on the ECB board have been pressuring for weeks slow down The purchase of bonds is based on the improvement of growth and inflation prospects, which will probably be reflected in the Central Bank’s forecasts for next month.

However, they have more “exciting” board members pushed backCalling on the ECB to maintain stimulus, at least until the economy fully recovers from the epidemic; inflation to grow steadily in line with its goal.

One of the board members said that the ECB is unlikely to slow down bond purchases, as investors were overwhelmed by fears of rising inflation, which, according to the Central Bank, will be only temporary, adding: “We do not want to encourage this by sending a signal of a slowdown in procurement.”

The ECB’s decision is compounded by the recent fall in government bond prices, which brought the eurozone-weighted 10-year gross domestic product (GDP) average to 0.27%, the highest level since June last year.

This step was partly due to the rise in prices German borrowing costs – reference for the rest of the euro area – from very low levels since the beginning of the year as investors respond to the improving outlook.

Germany’s 10-year yield was relatively high at minus 0.12% on Friday. Analysts at Goldman Sachs predict that profitability will be positive by the end of this year.

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10-year bond yield line chart showing Eurozone borrowing costs growing

The ECB responded to the recent significant jump in eurozone bond yields earlier this year by committing to buy “significantly higher” bonds in the second quarter.

But at the time, the eurozone was being weighed against the coronavirus, with the central bank looking at rising bond yields as an unwarranted outflow from the United States, which was recovering faster thanks to a $ 1.9 tonne stimulus package.

Investors believe that the European bond market is due to more real signs of recovery. “There was a lot of pessimism in the eurozone forecast at the beginning of the year,” said Mohamed Kazm, portfolio manager of Union Bancaire Privée. “Now, with the acceleration of vaccine programs, we are seeing some optimism, which is already being assessed in the United States.”

Brighter growth prospects dampen the attractiveness of high-risk assets such as German government bonds. Inflation expectations have also risen, both at home and abroad.

The German 10-year compensation rate for measuring market expectations for inflation is 1.41 percent, down from less than 1 percent at the beginning of this year. Although it is still well below the ECB, slightly below 2%, this means that the adjusted real yield on inflation has remained stable despite the bond market sales.

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Allianz economist Katarina Utermol says higher inflation expectations make it more likely that the ECB will “leave a little foot on the pedal” by slowing bond purchases in the first “second quarter”, adding that it was still a “communication challenge”. »:

The risk is that the ECB may accelerate the recent rise in borrowing costs for weaker, more indebted economies in the so-called periphery of the eurozone. Italy’s 10-year yield hit an eight-month high of 1.16 percent on Wednesday. The additional yield or spread that Rome is paying off compared to Berlin’s 10-year debt reached its highest level since January.

“It’s easy for hawks to say that this is part of a healthy recovery in inflation expectations, that the absolute level of profitability is still low,” said Frederick Ducrozett, Pickett Welt Management strategist. “But when you talk about the risk of recovery, you have to look at the suburbs.”



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