ECB Boosts Bond-Buying After Pledge to Fight Yield Gains

The European Central Bank finally delivered on its promise to boost the pace of emergency bond-buying to combat the economic threat from higher yields.

Net purchases settled last week climbed by 21.1 billion euros ($25.2 billion), the most since the start of December. That figure is reduced by redemptions -- the gross value of purchases will be disclosed on Tuesday.

ECB Boosts Bond-Buying After Pledge to Fight Yield Gains

German bonds held marginally higher on the day, with 10-year yields dropping one basis point to minus 0.31%. Those on their Italian peers were steady at 0.66%, with the spread between the two hovering above this year’s lows. The euro rose 0.2% to $1.1925.

Policy makers decided earlier in March to significantly increase buying under the program -- due to run for at least another year -- after a global bond sell-off spurred by reflation bets because of massive U.S. fiscal stimulus. Officials fear that Europe’s extended virus lockdowns and a slow vaccination rollout mean it isn’t ready to cope with higher borrowing costs.

The faster purchases came after weeks in which some policy makers expressed their worry, yet official data showed no sizable or sustained pickup in buying.

ECB President Christine Lagarde said in a blog post on Monday that the near-term outlook remains uncertain, and reiterated her promise to keep financing conditions favorable.

“We retain the option to adjust the pace of purchases at any point in time in response to potential changes in market conditions,” she said. “While much progress has been made and we can see light at the end of the tunnel, we cannot be complacent.”

What Bloomberg Economics Says...

“The new pace of purchases may be enough to prevent bond yields from rising further, but it’s unlikely to reverse the recent increase.”

-David Powell. To read his report, click here

Still, several officials have signaled that the increase in bond-buying is temporary, and will be reconsidered when updated economic projections will be available in June. Some Governing Council members are unperturbed by the rise in yields, believing it largely reflects optimism over the pending economic rebound.

Governing Council member Klaas Knot suggested on Monday that policy makers could reduce the pace of purchases in the summer if the economy proceeds as expected. He also said they may be able to start discussions on how to unwind their unprecedented monetary stimulus later this year if countries make sufficient progress on vaccinations.

“As long as we are in a situation with contact restrictions, it’s clear that the pandemic emergency purchase program won’t stop,” Knot, who heads the Dutch central bank, said in a press conference. “But if we make good progress with vaccinations, that moment will come somewhere later this year.”

Knot’s outlook for the Dutch economy highlighted the struggles of the euro zone. He said his nation’s economy will likely shrink 1% in the first quarter and grow just 2.2% this year.

The situation is equally dire in neighboring Germany. The Bundesbank on Monday predicted a sharp contraction in the first three months of 2021, arguing that measures to contain the coronavirus are stricter than in the previous quarter.

During talks on Monday, Chancellor Angela Merkel and regional leaders agreed to extend Germany’s lockdown until April 18 after Covid-19 contagion rates nearly doubled in a month.

The government said on Monday that it will take on just over 60 billion euros more debt than initially planned to help mitigate the impact of the coronavirus crisis.

©2021 Bloomberg L.P.

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