Tue, Sep 12, 2017 - Page 10 News List

ECB differences leave euro bond markets nervous

Reuters, LONDON

Borrowing costs in the euro area yesterday nudged further away from recent lows, as signs that European Central Bank (ECB) policymakers are a step closer to winding back hefty monetary stimulus weighed on sentiment.

Bank board member Benoit Coeure yesterday said that given the persistent challenges faced by the ECB in raising consumer prices, its definition of “medium-term,” the time horizon required to meet its inflation target, would be longer than usual.

Those comments briefly pushed bond yields down.

Although the ECB is expected to take baby steps toward exiting its stimulus scheme, news that policymakers have already discussed policy options has tempered sentiment in bond markets.

Reuters reported on Friday that ECB officials generally agreed their next move would be to cut bond purchases, and discussed four options, according to sources.

The news jolted markets a day after the ECB left policy unchanged and suggested that next month would be decision time regarding the future of the 2.3 trillion euro (US$2.76 trillion) bond-buying scheme.

The four options being considered, according to Friday’s report, include cutting monthly asset purchases from the current 60 billion euros to 20 or 40 billion from the start of next year, with the scheme running for another six or nine months.

Analysts said that this discussion of numbers in particular has unnerved the bond market.

“On Thursday there was a lot of relief that the ECB would stick to its expansionary stance, but latest comments suggest there is an ongoing discussion and that there are several council members in favor of a less expansionary stance,” DZ Bank strategist Daniel Lenz said. “We learnt the buying volume could be lower than previous market expectations.”

Germany’s 10-year bond yield was 1 basis points (BPS) higher at 0.33 percent, up just over 4 bps from two-and-a-half-month lows hit at the end of last week. It briefly touched the day’s low around 0.32 percent after Coeure’s comments.

Two-year German bond yields also pulled back from last week’s two-and-a-half-month lows to trade a tad higher at minus -0.78 percent.

For southern European bonds markets, especially vulnerable to signs of a scaling back of ECB stimulus, there was some support from a recovery in risk appetite on relief that the weekend passed with no North Korean missile tests.

Bond yields in Portugal, Spain and Italy were flat to a touch lower yesterday.

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