ECB Getting Uncomfortable with Rise in Yields

Euro zone bond yields have risen sharply since the start of the year, mirroring a similar move in U.S. Treasuries, but the ECB has so far played down these moves, arguing that nominal yields are not necessarily an appropriate benchmark.

But real, or inflation-adjusted, yields have also started to rise in recent days, fuelling some market speculation that the ECB may have to intervene, first verbally, then by stepping up bond purchases.

“Risk-free overnight indexed swap rates and sovereign yields are particularly important, because they are good early indicators of what happens at downstream stages of monetary policy transmission,” Lagarde said in a speech.

“Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields,” she said.

Yields fell sharply on Lagarde’s comments.

Germany’s 10-year Bund yield was last down 4 basis points on the day at -0.35%, having hit an eight-month high at -0.278% in early trade. Italian 10-year bond yields fell almost 4 bps to 0.58%.

With around 1 trillion euros still left unspent in the Pandemic Emergency Purchase Programme, the ECB had “considerable firepower and flexibility”, to guide financing conditions, Lagarde said.

The ECB has long argued that, even if the purchase quota was exhausted, policymakers could still add to it to ensure the bloc could come out of its biggest crisis yet.

Lagarde also reaffirmed the ECB’s pledge to preserve favourable financing during the pandemic. That commitment involved a focus on the entire chain of policy transmission, from risk-free rates to government borrowing costs, capital markets, and bank lending for firms and households.

Ten-year inflation-linked German government bonds yielded -1.30% early on Monday after trading as low as -1.66% in early February.

(Reporting by Balazs Koranyi; additional reporting by Dhara Ranasinghe; editing by Kevin Liffey and Larry King)