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Dovish ECB Comments Push Down Euro Area Yields

May 26 (Reuters) - Euro zone bond yields edged lower on Wednesday in a market supported by dovish European Central Bank commentary.

Euro area yields rose sharply earlier in the month, driven by speculation that a stronger economic outlook driven by speedier vaccinations in the bloc could prompt the ECB to slow its PEPP purchases at its June 10 meeting.

Those bets pushed Germany’s 10-year yield, the bloc’s benchmark, to two-year highs near positive territory last week, and the risk premium on Italian bonds to levels seen last November, before the ECB expanded the stimulus.

But comments from ECB president Christine Lagarde last week that it was too early for the central bank to discuss slowing its pandemic emergency bond purchases (PEPP), reinforced by comments from several others, have removed the upward pressure on euro area bond yields.

Adding to the dovish mood, ECB board member Fabio Panetta on Wednesday said the ECB should not reduce the pace of asset purchases as the economic recovery is in an early phase and inflation remains too low.

Germany’s 10-year yield was down nearly 2 basis points to -0.18% at 0715 GMT, far below the two-year highs hit at -0.074% a week ago.

Italy’s 10-year yield fell nearly 3 bps to 0.94%. It has fallen 17 basis points from May 20, in the biggest five-session falling streak since July 2020.

The closely watched spread between Italian and German 10-year bond yields - effectively the risk premium on the Italian debt - was at 112 bps, from nearly 125 bps last week.

“The market is... in wait and see mode with regards to the ECB,” said Jolien van den Ende, rates strategist at ABN AMRO.

“It’s the perfect timing to position for spread tightening,” she said, expecting the ECB will continue bond buying at this quarter’s pace during the third quarter.

ING strategists, however, flagged the risk that policymakers more hawkish than those that have spoken may contest their views.

“Note also that the rise in government yields never really spread to other markets, and that the pull-back in yields lessens the pressure on the ECB to maintain an elevated pace of (PEPP) purchases,” they wrote in a note.

In the primary market, Germany is scheduled to raise 2.5 billion euros from the re-opening of a 15-year bond, while Italy will raise up to 4.75 billion euros from the re-opening short-term bond and an inflation-linked 2030 bond, all via auction.

(Reporting by Yoruk Bahceli; editing by Barbara Lewis)

Source: Reuters

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