Revved-Up ECB QE Perplexes Traders as Volatility Strikes Back

Bond traders doubtful about the European Central Bank’s resolve to stem rising long-term borrowing costs are turning to the safety of data to reveal the true extent of the revved-up QE program.

A fresh bout of volatility gripped the region’s bond markets Friday, the day after the ECB announced it was ramping up the pace of bond-buying over the next quarter to curb rising yields that could stifle economic green shoots. But policy makers made no move to alter the overall size and duration of the 1.85 trillion-euro ($2.2 trillion) program, and most said privately they don’t plan to expand it. They also didn’t offer details on exactly how much more the bank plans to buy every week and month.

It’s all left investors fumbling in the dark for direction, and their focus is now turning to weekly and monthly reports on ECB bond buying for proof the bank has stepped up its purchases.

“Certainly the cleaner monthly data will become market-moving,” JPMorgan Chase & Co.’s head of EMEA securities trading Richard Gustard said in an interview. The pace could rise to 80 billion euros per month, marking a step-up from less than 60 billion euros in January, he said.

“Anything less than that will be reasonably bearish,” he said, while more than 80 billion euros would be considered “reasonably bullish.”

Revved-Up ECB QE Perplexes Traders as Volatility Strikes Back

European policy makers are grappling with how to tamp down sovereign yields rising along with rates in the U.S., where an efficient vaccine rollout is ushering in a faster recovery. The European economy is less able to cope with higher borrowing costs as delays in delivering the jab to its populations prolong human suffering and economic malaise.

The yield on benchmark German debt has risen over 25 basis points so far this year to around -0.30%, with some seeing it exiting negative territory by year-end. Longer-dated bonds are already above zero, with the rate on 30-year debt trading around its highest since June.

Jan von Gerich, chief strategist at Nordea Bank ABP, for one, is doubtful about how effective the changes will be in containing yields. He expects the impact to be short-lived, especially once the real pace of purchases is revealed.

“The ECB’s current stance is not enough to remove the risks of even faster increases in bond yields,” he said. “The eventual revelations of the actual new purchase pace may end up a disappointment.”

Sell-off Risk

The answer to the question of how fast the ECB is stepping up won’t show up on data due Monday, though traders will get a sense of the scale of the response in the next set of reports. The previous weekly data showed the ECB settled 11.9 billion euros last week, well below the average pace of 18 billion euros since the tool’s inception. Credit Agricole SA expects it to climb to as high as 25 billion euros.

This week’s policy tweak should help underpin a rally in German bunds through April, said Bank of America rates strategist Sphia Salim. Beyond tat, however, there’s a significant risk of a selloff thereafter when the program comes up for a quarterly review.

“The closer we get to the quarterly review date, the bigger the risk of a spike in rates and volatility, and thus also spreads,” she said.

Until then, traders will be left second-guessing the ECB until the weekly and monthly reports arrive.

Gustard at JPMorgan says the ECB cloaking its policy in ambiguity is a good thing -- from the perspective of the central bank at least.

“Markets like nothing more than a target,” he joked.

What’s coming next week:

  • Traders will be focusing on how the Federal Reserve and Bank of England respond following the ECB’s decision to accelerate the pace of purchases under its pandemic program. The Fed’s next decision is on Wednesday, followed by the BOE Thursday.
  • ECB’s Centeno due to speak Monday, while Guindos and Schnabel scheduled for appearances on Thursday. BOE’s Cunliffe and Haldane both due to speak also on Thursday.
  • European government bond supply is set to pick up to around 32 billion euros next week, according to Commerzbank AG. Germany, Spain and France are all set to come to the market, while the latter is expected to sell a 20-year green bond via syndication.
  • Datawise, the main focus will be on the final reading for euro area CPI data Wednesday, with the YoY figures through February expected at 0.9%, while core is at 1.1%.

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