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(Bloomberg) – Investors looking for a more definitive signal of what the European Central Bank really thinks about the latest bond sale should get one in the week ahead.
Data on central bank debt purchases is due Monday and will cover the week of March 5, when a global bond rout has peaked. While several members of the ECB’s Governing Council have tried to ease nerves in the face of the recent rise in yields, the institution’s bond-buying program has failed to accelerate to match.
The virtual silence on the subject of President Christine Lagarde adds to the unease of investors. While Fabio Panetta, a member of the ECB’s executive board, showed that there was some concern when he said that the current rise in yields is “undesirable” and “must be resisted”, some of his colleagues have been much more optimistic. Markets are unlikely to get another turn until Thursday’s rate decision as policymakers have now entered a period of calm.
“Everything is going very well, expressing his dissatisfaction,” said Richard McGuire, head of rate strategy at Rabobank, of the comments from ECB officials. “But the markets seem, given the limited response to this concerted rhetorical campaign, looking for the ECB to put its money where it is.”
No match
The most recent data on the ECB’s pandemic bond buying program showed that it had settled 16.9 billion euros ($ 20.1 billion) in purchases during the week to date. to February 26, the least in four weeks. The net amount was even lower at 12 billion euros due to large buybacks, when the ECB would have known those buybacks were coming.
The selling peak came two days later, with yields on Treasuries and European debt reaching levels last seen in the March 2020 crisis.
Louis Harreau, strategist at Crédit Agricole, described the purchase amount of the PEPP as “ridiculous”.
“I grew up with the motto ‘don’t fight the ECB’ and it’s like today, the market is fighting the ECB,” added Harreau.
German yields were pulled higher by their US and UK counterparts, who are far ahead in the vaccine race, suggesting that investors could get a head start on the continent’s late recovery.
Italian 10-year bond yields doubled from a record high to 0.84% in the second half of February. Their premium over their German counterparts, a key indicator of risk in the region, is 17 basis points above the six-year low set on February 12.
Discussion of links
While investors heard a lot from ECB officials last week, they were drawn in different directions.
A day after Panetta’s remarks, Vice President Luis de Guindos said bond spreads were “very calm”, and Bundesbank President Jens Weidmann said the rate hike was “not so that this is a particularly worrying development ”.
These remarks are in line with the broad view of Governing Council members, according to officials familiar with the internal discussions, who say policymakers believe they can manage the risk of rising returns through verbal interventions – including a commitment to act when necessary.
Close monitoring
Lagarde last commented directly on bond markets on February 22, saying the central bank was “closely monitoring” nominal bond yields. In a pre-recorded speech to German companies last week, she simply reiterated the ECB’s standard line that it will not allow funding conditions to tighten prematurely.
This position is arguably reminiscent of a year ago when the President sent Italian bonds into free fall saying that the ECB’s job is not to curb yield spreads.
Now bond investors are waiting for bond buying to match the rhetoric of the Board of Governors. Frederik Ducrozet, global strategist at Banque Pictet & Cie, expects Monday’s data to show the pace of weekly net purchases topped € 20 billion.
“It is only fair to expect the Executive Board to take the floor by temporarily increasing the pace of PEPP purchases,” said Ducrozet.
This week
Bond sales from Germany, Italy, the Netherlands and Portugal are expected to halve next week to € 15.5 billion, according to Commerzbank AG. Germany pays € 13 billion of buyouts and Ireland pays small coupons next week. The UK will offer just over £ 2bn of 10-year gilts and 20-year inflation-indexed debt next week; the BOE will buy back 4.4 billion pounds of debt over three operations. Most of the data for the coming week is relegated to secondary, retrospective figures; January industrial production figures are expected from Germany on Monday and the euro zone on Friday MondayDBRS Ltd. reviews Belgium and Moody’s Investors Service reviews Ireland on Friday
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