The European Central Bank has slowed the pace of growth of its bond holdings for the second consecutive week despite a debt market sell-off that fuelled policymakers’ concerns that rising borrowing costs will hamper the eurozone’s economic recovery.
The ECB’s bondholdings in its pandemic emergency purchase programme (PEPP) increased by a net €11.9bn in the week to March 3, data released on Monday showed — down from €12bn a week earlier and below the €18.1bn weekly average since the programme started last year.
The ECB has promised to use stimulus measures including the PEPP to maintain “favourable financing conditions” for the eurozone’s businesses and households. As a result, analysts had expected the data to show a larger increase in net purchases as a sell-off pushed bond prices down and yields up.
Instead, the figures suggest the ECB chose not to push back against rising borrowing costs by using the almost €1tn of its €1.85tn PEPP total which remains unspent, some said.
“There is no strong signal that the ECB is defending a certain level in the market,” said Antoine Bouvet, senior rates strategist at ING. “This is going to come as another disappointment to the market.”
The ECB said the weekly net purchase data was “affected by seasonality factors, in particular redemptions”.
“Recently there have been larger redemptions which lower our net purchases and temporarily delay the increase in our stock of bonds,” it said.
“Frankfurt, we got a problem,” tweeted Frederik Ducrozet, strategist at Pictet Wealth Management.
After “a second consecutive week of very low net PEPP purchases . . . despite dovish rhetoric . . . it’s a matter of consistency to put your money where your mouth is if you want to be credible,” Ducrozet said. “The risk is that they have to do more eventually.”
There was a muted market reaction; German 10-year bond yields stayed one basis point higher at minus 0.29 per cent after the ECB data was published, while Italian 10-year yields stayed slightly lower. Bond yields rise when prices fall.
The sell-off in bond markets has spread across the Atlantic to Europe, fuelled by expectations that a sharp US economic recovery will reignite inflation, eating into bonds’ fixed interest payments.
The eurozone economy is still weighed down by restrictions aimed at containing the coronavirus pandemic, so its output and inflation are recovering more slowly, leading several ECB governing council members to warn the steepening of yield curves was unjustified and unwelcome.
ECB president Christine Lagarde is expected to be asked how much tolerance its governing council has for higher borrowing costs and whether bond purchases will be stepped up at a press conference after its next monetary policy meeting on Thursday.
Krishna Guha, vice-president of Evercore ISI, said: “There is cause to wonder whether disagreements on the council as to how vigorously to oppose the rise in eurozone yields might have delayed the decision on accelerating purchases [until] the council meeting.”
Katharina Utermöhl, economist at Allianz, said the slowdown in net purchases showed “there is not the same sense of urgency [at the ECB] that there was in March 2020” at the height of the pandemic-fuelled sell-off, and this “means [policymakers] don’t think they have to throw the kitchen sink at it yet”.