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Euro zone yields fall after ECB says it will increase PEPP

  • Euro zone yields were already edging down, tracking moves in US Treasuries, which were affected by an auction of benchmark 10-year notes that was not as bad as feared.
  • The ECB barely increased its emergency bond purchases in recent weeks, stoking doubts about the bank's resolve to calm market nerves and support indebted governments through the pandemic.
Published March 11, 2021
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MILAN: Euro zone government bond yields fell and spreads tightened on Thursday, after the ECB said it would boost the pace of its Pandemic Emergency Purchase Program (PEPP).

The European Central Bank signalled faster money-printing on Thursday to keep a lid on euro zone borrowing costs but stopped short of adding firepower to its already aggressive pandemic-fighting package.

Euro zone yields were already edging down, tracking moves in US Treasuries, which were affected by an auction of benchmark 10-year notes that was not as bad as feared.

Euro area bond prices - which move inversely with yields - saw their worst performance in years in February, tracking US Treasuries which came under selling pressure from expectations a huge stimulus package would boost economic growth and inflation.

The ECB barely increased its emergency bond purchases in recent weeks, stoking doubts about the bank's resolve to calm market nerves and support indebted governments through the pandemic.

The ECB policy statement "is more dovish than anticipated" and suggested that the central bank "aims to correct the mis-match between its dovish rhetoric and apparent policy of benign neglect over the past two weeks or so," said Andrew Kenningham, chief Europe economist at Capital Economics.

Germany's 10-year government bond yield was down 4 basis point at -0.35%.

The spread between German and Italian bond yields tightened to 92, its tightest since Feb. 23.

Justin Onuewusi, portfolio manager at Legal & General highlighted the battle between hawks and doves at the ECB.

"While Panetta almost explicitly called for yield curve control, you had Schnabel saying a rise in nominal yields that reflects rising inflation expectations is a positive sign. That's the middle road you might see from the ECB," he said.

Despite the recent lack of direct intervention, real yields fell after ECB chief Christine Lagarde said on Feb. 22 the bank was "closely monitoring" rising borrowing costs.

They were also pressured by comments from ECB officials that suggested the bank's focus was also on real yields and the GDP-weighted sovereign bond yield curve and overnight index swap (OIS) curve (Philip Lane on Feb 25).

The market will focus also on the third Treasury auction of the week, with $24 billion of 30-year paper coming to market, later on Thursday.

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