ECB doubles bond buys as yields rise

FRANKFURT: The European Central Bank made its heaviest interventions in five weeks on the sovereign bond markets last week as euro zone governments sought to prevent a disorderly Greek default and peripheral debt yields rose after bond auctions.

ECB figures published on Monday showed the bank doubled its purchases to 4.49 billion euros worth of bonds in the period Oct. 13 - 19 from 2.243 billion the previous week.

It was the highest weekly total since the week ending Sept. 16 and took the programme's overall total to 169.5 billion euros. Some 240 million euros in previously purchased bonds matured last week, the data also showed.

Analysts attributed the rise to rising borrowing costs before the weekend's EU summit.

"This was in the run-up to the European leaders' meeting," RBS economist Nick Mattthews said.

"The data speaks for itself, the ECB needs to still be in these markets."

As usual the ECB said it would hold a "sterilisation" operation on Tuesday at which it takes 1-week deposits from banks to neutralise the inflation pressure the bond purchases create.

Europe is under pressure from its G20 peers to take swift, decisive action to stop the Greek debt crisis engulfing bigger euro zone states and hurting the already weak global recovery.

Italy and Spain have been seriously affected and seen their borrowing costs rise strongly over the last two months.

At 6 percent the Italian 10-year yield is matching levels which prompted the ECB to start buying Italian and Spanish bonds in the markets on Aug. 8 to support the two countries' battered debt.

The ECB was seen buying 10-year Italian bonds in the market last week to counter a widening in the yield spread between Italian sovereign bonds and their German equivalent, traders said.

The ECB reactivated its government bond-buying programme - known as the Securities Markets Programme -- in August to keep those costs in check, and to ensure its low interest rates benefit even troubled parts of the euro zone.

ECB President Jean-Claude Trichet said earlier this month that the central bank would not abruptly end the programme even though the euro zone bailout fund EFSF has been given the power to intervene in the secondary market and would wait until financial markets stabilise.

The European Commission said on Monday it expected the ECB to keep buying bonds.

But analysts expect the central bank to ease its intervention after the rescue fund starts to buy bonds.

"The programme is ongoing," Matthews said. "But the ECB will try to scale back its purchases when the EFSF is up-and-running and able to buy on the secondary market."

Under the bond-buying programme, the ECB and the 17 euro zone national central banks can buy government and corporate bonds from banks and other investors, but not directly from governments.

It also does not give a breakdown of its purchases. However, analysts and traders estimate it has bought around 45 billion euros of Greek debt and has concentrated largely on Italian and Spanish debt with the 97 billion euros it has spent since restarting its purchases in early August.

Purchases take two to three days to settle, meaning that when the ECB is buying, the weekly figures do not necessarily give the full picture.

Some ECB members strongly opposed restarting the programme, which sources say led to the resignation of Juergen Stark, one of ECB's most experienced Executive Board members.

Another opponent is German Bundesbank President Jens Weidmann. He has piled pressure on the ECB to end the programme as soon as possible, warning it blurs the lines between fiscal and monetary policy, allows politicians to slacken off from their responsibilities and threatens the ECB's independence.

Copyright Reuters, 2011