By Yoruk Bahceli and Dhara Ranasinghe
– Southern Europe led a fall in euro zone sovereign bond yields, while the euro steadied on Thursday after the European Central Bank said it will dial back its emergency bond purchases a notch but stressed that move was not a taper.
Borrowing costs across the euro area had shot up last week as hawkish comments from some officials put markets on alert that the ECB could move towards winding down its massive emergency stimulus.
But Thursday’s decision was in line with expectations for a slight slowdown from the current 80 billion euros per month of bond purchases.
And the ECB remained cautious: it flagged no other moves, notably how it ultimately plans to dismantle the 1.85-trillion-euro Pandemic Emergency Purchase Programme (PEPP) which has kept borrowing costs low.
Relief swept across debt markets, with 10-year bond yields in southern Europe – the biggest beneficiaries of ECB bond buying – down 6-10 basis points on the day.
Italy’s 10-year bond yield fell over 8 bps to 0.67% in their biggest one-day fall since March, narrowing the gap with German 10-year yields to around 102.40 bps from 108 bps late Wednesday.
“It seems like every single question was, we’ll see in December,” said Antoine Bouvet, senior rates strategist at ING, referring to ECB chief Christine Lagarde’s news conference.
“I don’t think (the meeting) is very much dovish at all. Expectations were perhaps too hawkish, that’s probably what we can infer from that market reaction.”
Graphic: Italy’s 10-year bond yield set for biggest daily fall since March – https://fingfx.thomsonreuters.com/gfx/mkt/klvykkxokvg/it0909.png
Greek 10-year yields fell 10 bps, while French and Portuguese 10-year bond yields were set for their biggest daily fall in two months. French 10-year yields slipped back into negative territory to last trade at -0.034%.
German yields were set for their biggest daily fall since July, with 10-year Bund yields at -0.36% and down almost 5 bps from Wednesday’s eight-week highs.
“For the market the outcome is an easy one to accept,” said Jefferies European economist Marchel Alexandrovich. “There were very small changes to the forecasts. So, if the economic outlook is essentially unchanged then so is monetary policy.”
The ECB upgraded its growth forecast for this year to 5% from a previous 4.6% target and raised inflation expectations. Inflation is now seen at 2.2% this year, falling to 1.7% next year and 1.4% in 2023 – well below the ECB‘s 2% target.
Graphic: Markets react to the Sept ECB meeting – https://fingfx.thomsonreuters.com/gfx/mkt/gdpzyyzaavw/ecb0909.png
The euro was flat at $1.18155, in choppy trade following the ECB announcement. European stocks were also whipped around, last settling up 0.2% higher.
Analysts see the PEPP purchase slowdown as a largely technical adjustment. Given the remaining PEPP envelope, the ECB would not be able to buy more than 73 billion euros a month on average anyway, according to UniCredit.
They expect the ECB will need to increase its conventional APP asset purchases, currently at 20 billion euros a month, once PEPP ends.
“All the tough decisions – on bond purchases after March 2022 and the future of the TLTROs – have been postponed,” said Arne Petimezas, analyst at AFS Group.
“It is quite possible that the ECB will not be ready by December, and that we will have to wait until January or March 2022 before we get a conclusion.”