The pace of ECB bond purchases slows despite market nervousness

The European Central Bank has slowed the pace of growth in its bond holdings for the second week in a row despite a liquidation in the debt market that has fueled policymakers’ fears that rising borrowing costs will hamper the economic recovery of the eurozone.

The ECB’s bond issues in its emergency pandemic purchasing program (PEPP) rose by € 11.9 billion net in the week to March 3, according to data released on Monday, up from € 12 billion a week earlier and below the weekly average of 18, 1 billion euros since the start of the program last year.

ECB pledged to use stimulus measures, notably the PEPP, to maintain “favorable financing conditions” for businesses and households in the euro area. As a result, analysts expected the data to show a larger increase in net purchases as a liquidation pushed bond prices down and yields up.

Instead, the figures suggest that the ECB has chosen not to push back rising borrowing costs by using nearly € 1 billion of its total PEPP of € 1.85 billion that remains unused, according to some.

“There is no strong signal that the ECB is defending a certain level of the market,” said Antoine Bouvet, senior rate strategist at ING. “This will be another disappointment for the market.”

The ECB said weekly data on net purchases was “affected by factors of seasonality, in particular redemptions”.

“Recently there have been larger buybacks that reduce our net purchases and temporarily delay the increase in our bond stock,” he said.

“Frankfurt, we have a problem,” tweeted Frederik Ducrozet, strategist at Pictet Wealth Management.

After “a second consecutive week of very low net PEPP purchases. . . despite accommodating rhetoric. . . it’s all about consistency in putting your money where your mouth is if you want to be credible, ”said Ducrozet. “The risk is that they have to do more eventually.”

There was a muted market reaction; German 10-year bond yields remained one basis point higher at minus 0.29 percent following the release of ECB data, while Italian 10-year yields remained slightly lower. Bond yields rise when prices fall.

Sale in bond markets has spread across the Atlantic to Europe, fueled by expectations that a strong economic recovery in the United States will revive inflation, eating into fixed interest payments on bonds.

The euro area economy is still weighed down by restrictions aimed at containing the coronavirus pandemic, so that its output and inflation recover more slowly, leading several members of the ECB’s governing council to warn that steepening yield curves were unwarranted and unwelcome.

ECB President Christine Lagarde is expected to be asked how her Governing Council is tolerant of higher borrowing costs and whether bond purchases will be stepped up at a press conference after its next monetary policy meeting on Thursday.

Krishna Guha, vice chairman of Evercore ISI, said: “It is questionable whether disagreements within the board over the strength of opposition to rising eurozone yields could have delayed the decision. to speed up purchases. [until] the board meeting. “

Katharina Utermöhl, economist at Allianz, said the slowdown in net buying shows there isn’t the same sense of urgency [at the ECB] that in March 2020 there was “at the height of sales following the pandemic, and that” means [policymakers] don’t think they have to throw out the kitchen sink yet ”.

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