Thursday, 23 August 2012 18:12
LONDON: European Central Bank President Mario Draghi's promise to do "whatever it takes" to save the euro zone probably won't include setting caps on Italian and Spanish government bond yields, a Reuters poll suggested on Thursday.
Sixteen out of 20 fixed income strategists and economists polled this week said the ECB would not set a cap on those countries' government bond yields, a defined level at which it would step into the market and purchase those bonds.
The remaining four said it would.
The poll was conducted before central bank sources told Reuters on Thursday the ECB is at least considering such a move, but that nothing would be decided before the Sept. 6 policy meeting.
"Explicit caps on bond yields would place a too large burden on the ECB," said Kristian Toedtmann, senior economist at DekaBank in Frankfurt.
"With such a policy, it could be forced to intervene in the government bond markets with almost unlimited amounts. At the same time, the ECB would lose influence on euro zone governments as it cannot enforce conditionality of its purchases."
But while not announcing specific yield targets, the ECB will express a strong willingness to support government bonds, so long as governments stick to their reform commitments, said Toedtmann.
ECB President Mario Draghi signalled earlier this month that the bank may start buying government debt to reduce crippling Spanish and Italian borrowing costs, comments that fuelled a broad-based upturn in sentiment on global markets.
Spanish and Italian 10-year government borrowing costs, which flirted with unsustainable levels in mid-July, have eased almost 15 percent each since then, though they remain uncomfortably high.
Over the same period, the safe-haven German 10-year government bond yield has risen by around 20 percent.
Analysts in the monthly poll still trimmed their 12-month forecast for the 10-year Bund yield, as well as the 10-year British gilt yield, to the lowest level since the survey series started in 2002.
There was a subtle change in the consensus for US Treasury yields compared with the last poll. Forecasters bumped up their outlook for the 10-year T-note yield across each of the three-, six- and 12-month time horizons, for the first time since November last year.
The polling took place before Wednesday's release of minutes from the US Federal Reserve's last policy meeting, which do not square easily with its findings.
The minutes suggested the Fed is likely to deliver another round of monetary stimulus "fairly soon" unless the economy improves considerably.
The poll suggested the 10-year T-note yield will still be around 1.7 percent in three months' time, before rising to 1.9 percent in six months, and 2.2 percent in 12 months' time.
"A recovery in global growth and more stability in the euro zone due primarily to monetary policy responses should also support somewhat higher (US money and Treasury) rates," said Scott Anderson, chief economist at San Francisco-based Bank of the West.
The prospect of more monetary easing from the Bank of England should will also keep British 10-year gilt yields in check, the poll showed, rising to around 2.23 percent in 12 months' time from now, compared with Thursday's level around 1.6 percent.
"Continued BoE gilt purchases remain a strong support for gilts but creeping worries about the UK fiscal position and the threat posed to its coveted AAA status look set to weigh on gilts particularly at the longer-end," said Nick Stamenkovic, macro strategist at RIA Capital Markets in Edinburgh.
Copyright Reuters, 2012