Rising bond yields decided to test the ECB’s nerves before deciding to shrink


The euro zone government’s borrowing costs have risen again, testing the nerves of European Central Bank policymakers before deciding whether to slow down asset purchase decisions from next month.

If the ECB at its next board meeting on June 10 does reduce its bond purchases from the recent net purchases of over 80 billion euros per month, it will work with other central banks that have already done so to cope with more changes. Good situation. Economic prospects, including Canada and the United Kingdom.

Fed officials have Discussed Whether to start talking about reducing its bond purchases at a meeting in late April.

However, the recent rise in bond yields underscores how cautious the ECB will need to be when it withdraws from emergency stimulus measures if it wants to avoid unwelcome increases in financing costs in certain weak EU economies.

Last Friday, the President of the European Central Bank, Christine Lagarde, responded to a question about whether the European Central Bank will slow down its bond purchases. Issues for debate”.

Lagarde added: “I’ve said repeatedly that policymakers need to build the right bridge between the pandemic as a whole and deep into the recovery so that we can actually fulfill our tasks. This is what we will do.”

The withdrawal of monetary stimulus after the crisis is a balancing act. Doing so too quickly will scare investors and put the recovery in danger. But this is too slow, and the economy may overheat, which makes tightening policies even more painful in the future.

Paul Diggle, deputy chief economist at Aberdeen Standard Investments, said: “This is a magician’s trick.” “If Lagarde can manage communication in a very safe way , Then maybe she can avoid this gradual reduction and deepening the sell-off.”

The more conservative “hawks” on the ECB Council have been working hard for several weeks, hoping Slow down Bond purchases believe that the growth and inflation outlook may be justified, and this is likely to be reflected in the central bank’s latest forecast next month.

But there are more “paranoid” board members PostponeCall on the European Central Bank to maintain stimulus measures at least until the economy fully recovers from the pandemic, and the inflation rate continues to rise, in line with its goals.

A council member said that the European Central Bank is unlikely to slow down its bond purchases because investors overreacted to concerns about rising inflation. The central bank believes this is only temporary, adding: “We don’t want to send an inflationary signal through Signals to encourage this. The rate of purchases has fallen.”

The European Central Bank’s decision has been complicated by the recent fall in government bond prices, which has raised the GDP weighted average of 10-year government bonds in the Eurozone to 0.27%, the highest level since June last year.

This move is partly due to German borrowing costs Since the beginning of the year, benchmarks in the rest of the euro zone have fallen from very low levels, because investors have responded to improved prospects.

The yield on Germany’s 10-year government bond was relatively high on Friday, at -0.12%. Goldman Sachs analysts predict that yields will turn positive later this year.

The challenge for the European Central Bank is that it will work to maintain “favorable financing conditions” to prevent the borrowing costs of households, businesses and governments from exceeding the pace of economic recovery.

Line chart of 10-year bond yield shows rising borrowing costs in the euro zone

The European Central Bank’s response to the most recent surge in euro zone bond yields at the beginning of this year was a pledge to purchase bonds at a “significantly higher rate” in the second quarter.

But at that time, the Eurozone was still under pressure from coronavirus containment measures. The central bank regarded the rise in bond yields as an unprovoked spillover from the United States. Due to the 19,000-ton fiscal stimulus plan, the recovery of bonds was faster.

Investors now believe that the European bond market is driven by more real signs of recovery. Mohammed Kazmi, the portfolio manager of Union Bancaire Privée, said: “Since the beginning of the year, the outlook for the Eurozone has been quite pessimistic.” “Now with the acceleration of the vaccine program, we are seeing some optimism that is already priced in the United States. “

Bright growth prospects have weakened the attractiveness of ultra-safe assets such as German government bonds. Inflation expectations at home and abroad have also increased.

As an indicator of market-based inflation expectations, Germany’s 10-year break-even point is 1.41%, which is higher than the less than 1% earlier this year. Although this is still far below the ECB’s target of slightly below 2%, it means that despite the bond market being sold off, the actual yield after deducting inflation has remained flat.

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Allianz economist Katharina Utermöhl said that higher inflation expectations make the European Central Bank more likely to slow down bond purchases to between the first and second quarters. Slightly let go,” he added, becoming a “communication challenge.”

The risk is that the European Central Bank may accelerate the recent rise in borrowing costs for weak, debt-laden economies-the so-called peripheral countries of the euro zone. Italy’s 10-year government bond yield reached an eight-month high of 1.16% on Wednesday. Compared with Berlin with 10-year debt, Rome’s extra income or spread has reached its highest level since January.

Frederik Ducrozet, a strategist at Pictet Wealth Management, said: “Hawks can easily say that this is all part of a healthy recovery in inflation expectations, and the absolute level of returns is still very low.” “But when it comes to the risks of economic recovery, you External spreads must be considered.”



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