ECB’s Bond-Buying Program Is Yield Curve Control, Says Citi

(Bloomberg) -- The European Central Bank has taken a step closer to its Japanese peer and effectively launched yield-curve control on the region’s bond market, according to Citigroup Inc.

After the ECB scrapped its 33% issuer limits, the bank’s Pandemic Emergency Purchase Program can buy bonds almost freely across the region, enabling it to control the shape of the curve, according to Citigroup. Policy makers now have the ability to keep the yield premiums of Europe’s most-indebted countries in check, preventing them from spiraling into another sovereign debt-crisis.

The Bank of Japan pioneered yield-curve control in 2016, and is currently seen as having a 10-year yield target range of about 20 basis points from zero. In Europe, bund yields will hover around current levels, with peripheral yields closing their coronavirus-induced premiums over Germany, Citigroup said.

“The details of PEPP make it even clearer that the ECB has embarked on yield curve control and sovereign spread control in all but name,” strategists led by Jamie Searle wrote in a note to clients. “Sellers have been warned; the ECB will buy.”

Italy’s yield premium over Germany erased its rapid widening earlier this month following the ECB announcement Thursday. The institution is still bound by buying bonds according to the size and population of each economy.

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