The European Central Bank has given its latest monetary policy choice, promising a rise to the speed of its Pandemic Emergency Purchase Programme (Pepp). Market participants were eager to find a tangible demonstration of support in light of the harsh sell-off of the final month.
The conclusion, which will be welcomed by SSA market participants, comes a day before the anniversary of ECB president Christine Lagarde’s infamous claim that”we are not here to close spreads.”
European government bond yields have risen sharply over the past couple of weeks, propelled by higher US Treasury yields and reflation expectations across the Atlantic. Leading ECB figures such as Lagarde, executive board member Isabel Schnabel and chief economist Philip Lane have, over the past few weeks, made announcements in an attempt to head off the increase.
The message from all three was apparent: the ECB is tracking bond yields and will use the full flexibility of this Pepp to avoid a breakdown of favourable financing conditions.
However, in spite of their calming words, government bonds continued to trade down. 10-year BTPs, by way of instance, although they are off their recent peak yields, are still greater than 20bp above the February lows. As one euro rates strategist put it, “talk won’t do the trick.”
While ECB leaders are promising to use the flexibility of their Pepp for many weeks, they have yet to actually do so. The ECB’s net asset purchases have dropped since the start of February.
That will change, together with the ECB’s forward guidance promising”purchases under the Pepp over the next quarter to be conducted at a significantly higher pace than during the first months of this year.”
The SSA marketplace was anticipating this growth with several borrowers having raised sizeable amounts in euros this past week. A banker at one of the leads said:”It seems that investors are expecting the ECB to guarantee them and promise support.”