Bloomberg / Frankfurt
European Central Bank policymakers are downplaying concerns over rising bond yields, suggesting they can manage the risk to the euro-area economy with verbal interventions including a pledge to accelerate bond-buying if needed.
ECB Governing Council members, who meet next week to set policy, see no need for drastic action such as expanding the overall size of their €1.85tn ($2.24tn) emergency asset-purchase programme, according to officials familiar with internal discussions.
The officials didn’t say whether the pace of purchases has been stepped up in recent days, for which data isn’t yet available. One person noted that yields fell on Monday after some policy makers said the institution would react against unwarranted increases. An ECB spokesman declined to comment.
The relatively sanguine mood was backed up yesterday by Governing Council members including ECB Vice President Luis De Guindos and Bundesbank President Jens Weidmann, who said in public remarks that they’re not too worried.
European yields rose, led by the longest-dated debt. The rate on German 10-year bonds climbed as much as seven basis points to minus 0.28%. The euro was down 0.2% at $1.2073 yesterday.
The global sell-off of government bonds originates from the US, where prospects of massive fiscal stimulus are bolstering the economy and lifting inflation expectations.
In Europe, Greek and Italian 10-year yields led the charge, climbing about 20 basis points in the past two weeks. Benchmark German yields touched levels last seen in March 2020, and those for their French equivalents briefly turned positive for the first time since June.
That’s a problem for the euro area because sovereign yields are used by banks as a reference point for lending. The region’s recovery is already expected to be slower than that of many other advanced economies, in part due to its slow vaccine roll-out, and higher borrowing costs could further damp momentum.
Policymakers have been rolling out public appearances before their weeklong quiet period starts this Thursday. Guindos said yields have risen from very low levels and “the situation is very calm” when looking at spreads between different nations. Weidmann told Bloomberg Television that “the size of the movements is not such that this is a particularly worrisome development.”
The Bundesbank head added that the ECB is ready to adjust the pace of asset purchases if needed though, saying that “we want to preserve favorable financing conditions for the non-financial sector – that’s not just looking at financing costs for governments, it’s a much broader picture.”
Bank of Spain Governor Pablo Hernandez de Cos said at a separate event that rising yields may reflect market expectations of an earlier start to unwinding monetary stimulus, and that “avoiding premature increases in nominal interest rates” is essential.
“It may take more concrete action to contain global spillovers to euro-area borrowing costs. In our view, the ECB should be increasing the pace of its Pandemic Emergency Purchase Programme this week”, says Jamie Rush, David Powell and Maeva Cousin.
Earlier in the week, Executive Board member Fabio Panetta said the jump in yields “is unwelcome and must be resisted.” He also said it is “not too late” to act. French Governing Council member Francois Villeroy de Galhau said the ECB “can and must react” to any unwarranted moves.
The latest purchasing data surprised investors though by showing that the central bank actually slowed buying last week, despite President Christine Lagarde saying policy makers are “closely monitoring” the rise in nominal bond yields.
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