“Longer duration”: Investors bet that European Central Bank bond purchases will continue
Investors bet that the European Central Bank’s new strategy means that it will continue to buy bonds, thereby pushing down the euro zone’s yields. But the central bank still has work to do to convince the market that it can meet the revised inflation target.
Christina Lagarde is aware of the challenge, President of the European Central Bank Tell the financial times This month, “the proof of the pudding will be eating”.
European Central Bank observers will see how the new strategy will be implemented when the new monetary policy guidance is issued on Thursday.
Most investors expect Lagarde to say that the European Central Bank will strengthen its bond purchase program after the end of next year’s 185 million euros pandemic emergency purchase plan (PEPP) and be more patient before raising interest rates. But they are not sure how aggressive the new guidelines are and what difference it will make.
Elga Bartsch, head of economics and market research at the BlackRock Institute for Investment, said: “The European Central Bank has significantly reduced the possibility of premature tightening.” “Now, when the new strategic framework is implemented, we may get dovish surprises.”
The yield on German 10-year bonds fell to minus 0.41% on Tuesday, the lowest level since February, as concerns about the mutation of the Delta coronavirus have increased, stimulating demand for safe assets.But since the European Central Bank, Eurozone bonds have rebounded to sum up Two weeks ago, its 19-month strategic review agreed to a simplified, slightly higher Inflation target 2%.
Robert Tipp, head of global bonds at PGIM Fixed Income, said: “In addition to PEPP, there will be a serious purchase plan. It is hard to imagine that they will not emphasize this message.” “This is ultimately bond support.”
The European Central Bank’s Governing Council also agreed that its policies need to be particularly “powerful and durable” when operating in a world of low interest rates and low inflation (as it is now), which it said could mean a mild and temporary overshoot of its new targets.
This is not as good as the Federal Reserve Board, which Decide The average inflation target was adopted last year. Nevertheless, economists expect that the latest inflation guidance from the European Central Bank may temporarily exceed its target.
Lagarde promised that the new guidelines will be “clearer and clearer” with fewer terms.she was Tell the Financial Times: “When we say that our response must be particularly strong or durable, I think persistence is precisely to show that we will not tighten up prematurely.”
Luigi Speranza, chief global economist at BNP Paribas, stated that the European Central Bank, through its PEPP, buys 80 billion euros of bonds each month and “has taken strong action”, adding: “Now they say that through perseverance, it Will stay strong for a longer period of time.”
He stated that one way this can be done is to “obviously reflect in the actual underlying inflation dynamics” before considering reaching the new target-this is the European Central Bank executive Isabel Schnabel (Isabel Schnabel) Already said Twice in recent weeks.
This means that it will also pay attention to core inflation, eliminate volatile energy and food prices, and wait for strong evidence that it continues to rise in accordance with the 2% target. This may also indicate that wages need to rise at a healthy rate before they can react.
“With the release of the new strategic framework, the European Central Bank has opened the door to a more moderate strategy,” said Krishna Guha, Vice President of Evercore ISI. “Now it must pass through it.”
The European Central Bank has a strong influence on the bond market. Since the beginning of 2020, it has purchased almost all newly issued Eurozone government bonds, and its holdings account for about 42% of all sovereign debt in the Eurozone.
Investors will also look for any signs that the European Central Bank’s regular asset purchase program-still operating at a rate of 20 billion euros per month-will expand to 40 to 60 billion euros and be more flexible to maintain high levels when PEPP exits. Horizontal stimulus measures.
Barclays economist Silvia Ardagna predicts that the European Central Bank will purchase another 700 billion euros of assets next year, adding: “The key message of the European Central Bank’s revised forward guidance will be’easy for a longer time.'”
However, the Frankfurt-based institution is unlikely to provide details on the termination of PEPP before the next economic forecast in September, when it will have a better understanding of the impact of the Delta Coronavirus on economic growth.
At the same time, given the long-term and extraordinary Low inflationDespite lowering interest rates to negative values ??and purchasing trillions of euros in assets, since the 2008 financial crisis, the Eurozone inflation rate has averaged only 1.2%.
Euro 5-year 5-year inflation swaps (a popular indicator of market-based long-term inflation expectations that are closely watched by the central bank) are currently trading at only 1.56%, although current inflation has rebounded as the economy reopens.
Andrew Bosomworth, managing director of Pimco, said: “The European Central Bank has raised the question of how to achieve this more ambitious goal from such a low starting point, using the same old tools. “This creates a credibility issue, which we believe will suppress inflation expectations. “