Eurozone government bonds have staged a strong rally after a parade of European Central Bank policymakers signalled that it was too soon to dial down their emergency stimulus efforts.
Germany’s 10-year yield fell to minus 0.2 per cent on Wednesday, undoing a sharp rise earlier this month that came as markets responded to a brightening economic outlook for the euro area.
The 10-year Bund yield, which serves as a benchmark for assets across the currency bloc, hit a two-year high of minus 0.07 per cent a week ago. The increase, which reflects a fall in prices, came as a growing group of investors bet the ECB would react to improving economic forecasts by reducing its €80bn a month in net bond purchases as soon as next month.
Since that time, however, several senior ECB officials have indicated that they view it as too early to start withdrawing monetary stimulus.
The latest is Fabio Panetta, an ECB executive board member, who said in an interview with Nikkei published on Wednesday that “a premature withdrawal of policy support would risk suffocating the recovery before it becomes self-sustained”.
“The conditions that we see today do not justify reducing the pace of purchases,” said Panetta, adding that any discussion about phasing out the ECB’s €1.85tn pandemic emergency purchase programme (PEPP) was “still clearly premature”.
His comments, which came a day after similar ones by the governors of the Greek and French central banks, have punctured what had been a growing conviction in markets that the ECB would “taper” its bond buying next month.
“The ECB is clearly not going to be tapering in June,” said Gareth Colesmith, head of global rates at Insight Investment. “I expect they need to see a few more months of strong economic data first.”
This week’s rally has also buoyed bonds issued by more indebted eurozone members like Italy. The extra yield, or spread, that Rome has to pay compared with German debt had begun to widen during the earlier sell-off — potentially setting off alarm bells at the ECB’s headquarters in Frankfurt.
“It’s spreads that will have been concerning for them,” said Colesmith. “Germany won’t have a problem funding itself at [10-year borrowing costs of] zero, but if Italian yields rise too fast that does pose a threat to the recovery.”
The most significant pushback against calls by some conservative “hawks” on the council for a slowdown in bond buying came on Friday when ECB president Christine Lagarde said it was “far too early, and it’s actually unnecessary to debate longer-term issues”.
Having twice expanded the size of the emergency bond-buying scheme last year, the ECB has less than half the overall €1.85tn left to spend under PEPP. It plans to keep net purchases going until at least March 2022 and to stop only once the pandemic crisis is over.
Recent business and consumer surveys indicate the eurozone economy is poised for a strong rebound in the second quarter, after sliding into double-dip recession at the start of the year, and the ECB is likely to raise its growth and inflation forecasts in June.
However, several ECB council members told the Financial Times this week that there was still too much uncertainty to decide a timetable for winding down bond buying under PEPP, calling for this discussion to be put off until September or even December.
“There shouldn’t even be a debate about slowing the pace of purchases” said Richard Barwell, head of macro research at BNP Paribas Asset Management. “Panetta could not have been clearer — if you are serious about delivering your inflation mandate then you have no business talking about tapering.”
Compared with other central banks plotting their exit from stimulus programmes spurred by the pandemic — like the Federal Reserve and Bank of England — the ECB continues to face long-term inflation expectations well below its target of close to 2 per cent.
“They’ve missed their inflation target for so long, markets are more likely to view them tapering prematurely as a mistake,” said Jacqui Douglas, chief European macro strategist at TD Securities.
Source: Economy - ft.com
