ECB Slows Bond-Buying Despite Strong Warnings on Yields

ECB slowed emergency bond-buying pace last week, suggesting policy makers relied on verbal interventions to stem rising yields.

ECB Slows Bond-Buying Despite Strong Warnings on Yields
A Eurosystem monetary authority sign stands outside the European Central Bank headquarters in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

The European Central Bank slowed emergency bond-buying pace last week, suggesting policy makers mostly relied on verbal interventions to stem rising yields that jeopardize the region’s economic recovery.

Gross purchases settled under its pandemic emergency program totaled 16.9 billion euros ($20.3 billion) last week, the least in four weeks. That’s despite multiple top officials warning that the euro area might not be able to cope with higher borrowing costs.

ECB Slows Bond-Buying Despite Strong Warnings on Yields

ECB Executive Board member Fabio Panetta said Tuesday that the jump in government-bond yields seen in recent weeks “is unwelcome and must be resisted.”

“It is not too late,” he argued during an online event. “We are assessing market conditions, we can intervene and recalibrate the pace of our purchases, and in the last 12 months we have been quite effective. And I think we can still be effective in steering market conditions and yields.”

On Monday, the ECB reported a slowdown in net bond purchases and said that was because of redemptions. The latest figures showed that those redemptions totaled nearly 5 billion euros. Neither set of data reflects orders made Thursday and Friday, as transactions take a couple of days to settle and show up in the central bank’s accounts.

Panetta’s comments follow remarks by French Governing Council member Francois Villeroy de Galhau on Monday saying the institution “can and must react” to any unwarranted moves threatening to undermine the economy.

ECB Vice President Luis de Guindos echoed that sentiment in an interview, arguing it’s key to understand whether bond yields have risen due to inflation trends or other factors. In any case, officials “have the flexibility that is needed in order to react,” he said.

Yields are being pushed up by a global sell-off of longer-term government bonds originating in the U.S. where prospects of another dose of massive fiscal stimulus are bolstering the economy.

“We are already seeing undesirable contagion from rising U.S. yields into the euro area yield curve,” Panetta said. “If unaddressed, this would lead to a tightening of financing conditions that is inconsistent with our domestic outlook and inimical to our recovery.”

The ECB “should not hesitate” to increase the pace of its bond-buying if needed, he added.

For the euro area, higher yields pose a problem because returns on sovereign debt 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.

European bonds edged lower Tuesday led by Italy, which saw 10-year yields rise 4 basis points to 0.70%. Those on their German peers were 1 basis point higher at minus 0.33%.

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