ECB’s Schnabel Warned of Stocks Risk From Rising Yields

European Central Bank Executive Board member Isabel Schnabel warned her fellow policy makers last month that a rise in real yields internationally could hit the stock market.

“Stock prices could eventually become vulnerable to a rise in real yields globally,” Schnabel, in charge of markets, said during the Jan. 20-21 Governing Council meeting, according to an official account. “A more sustained rise in real rates could rapidly lower the relative attractiveness of equities and thereby pose the risk of a more broad-based repricing.”

The Governing Council saw it as essential to convey a commitment to “maintaining a steady presence in the markets to ensure favorable financing conditions,” and “that it continued to stand ready to adjust all of its instruments, including the deposit facility rate.”

Bond yields across the world have climbed this year as inflation comes back onto investors’ radar, with strong U.S. economic data, the promise of more stimulus and successful vaccine programs all pointing to a rapid growth recovery.

While prospects for the euro area are more muted amid continued lockdowns in many countries, monetary and fiscal authorities have remained adamant that improvements will eventually materialize.

The ECB last ramped up support in December to preserve “favorable” financing conditions for businesses and households. In January, officials determined these were “generally supportive for both the bond market and bank lending,” though “it was important to monitor the recent increase in nominal risk-free rates, which could be attributed to the spillover from the more substantial increase in U.S. yields.”

At the same time, ECB officials noted increases in nominal yields could be misleading “as they could rise because of a better economic outlook and higher inflation expectations.” They argued that “what mattered from a monetary policy perspective was the evolution of real rates, which had declined to record low levels in recent weeks.”

The ECB’s usual reticence to comment on stock-market movements, in tune with central banks more generally, raises the significance of Schnabel’s four-week-old remarks. An extended rally in global equities since then pushed values to historic highs this week.

©2021 Bloomberg L.P.

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