ECB Buying Italian Bonds in Bid to Halt Market Rout

(Bloomberg) -- The European Central Bank has stepped up purchases of Italian bonds in an attempt to stabilize the market amid a selloff because of the coronavirus pandemic, according to an Italian official.

The purchases, via the Bank of Italy, are for a very significant amount and will continue for as long as needed, the official said, asking not to be named discussing confidential operations. An ECB spokesman declined to comment.

The news eased the pressure on Italian debt. While the yield on the nation’s 10-year bonds climbed about 30 basis points, that is less than half the jump in rates earlier today.

Radiocor news agency reported the Italian bond-market intervention earlier, citing central banking sources it didn’t name.

European sovereign bonds are leading a global rout on concerns about how nations will fund spending plans of more than $1 trillion to fight the coronavirus crisis. Bonds in Italy, which already has Europe’s second-largest debt burden and is the hardest hit by the disease, is being particularly slammed.

A lack of liquidity in the market is widening the gap between bids to buy bonds and offers to sell them, leading to erratic moves in pricing that ECB intervention may help to control.

The spike in yields is reminiscent of Europe’s debt crisis which almost split the currency bloc, and the global financial crisis of more than a decade ago. Even safer bonds from the likes of Austria and France are seeing yields rise relative to the region’s bench German bunds -- known as the yield spread.

ECB Executive Board member Isabel Schnabel, who runs the institution’s market operations, said on Wednesday that the central bank should intervene if liquidity dries up and monetary policy transmission is at risk.

“That’s exactly what we’ve been doing intensively since last Thursday,” Schnabel told Zeit newspaper. “Our bond purchases have a stabilizing effect on the market.”

ECB President Christine Lagarde stoked concerns among investors last Thursday when she said it wasn’t the institution’s job to “close the spreads.”

She later walked back those remarks, and colleagues including chief economist Philip Lane rallied to say the ECB was ready to buy more debt of nations such as Italy to calm mounting financial panic.

Bank of Italy Governor Ignazio Visco told Bloomberg TV on Friday that the ECB could skew its bond purchases within the quantitative easing program toward the worst-hit countries.

The ECB added 120 billion euros ($132 billion) to its QE program as part of the new stimulus program agreed last week.

©2020 Bloomberg L.P.