ECB Slows Pandemic Bond-Buying Despite Bond-Rout Concerns

(Bloomberg) -- The European Central Bank slowed the pace of pandemic bond-buying last week even as officials warned that a global rise in yields could derail the economic recovery.

The institution settled 12 billion euros ($14.5 billion) of net purchases under its emergency program, compared to 17.2 billion euros the week before.

The decline is due to much higher redemptions, according to an ECB spokesman. Those data will be published on Tuesday.

Falling government bond prices are a concern for central banks because they push up yields, which are a benchmark for interest rates on loans to companies and households. While ECB officials pledged last week to avoid any undue rise in yields, their verbal interventions only briefly stopped investors from selling.

The ECB must push back against rising bond yields if they don’t adequately reflect the state of the economy, Governing Council member Francois Villeroy de Galhau stressed Monday.

“In so much as this tightening is unwarranted, we can and must react against it, starting with an active flexibility of our PEPP purchases,” he said in a speech on Monday. The ECB stands ready to adjust all instruments including its deposit rate, he added.

The ECB’s purchase data don’t reflect orders made Thursday and Friday, as transactions take a couple of days to settle and show up in the ECB’s accounts.

German bonds pared gains following the announcement, leaving the 10-year yield seven basis points lower at minus -0.32% compared to minus -0.34% earlier.

“It is unfortunate timing, if they wanted to send a signal to the market,” said Piet Christiansen, chief strategist at Danske Bank A/S. “But they would have been aware of the large redemption.”

The French government redeemed a 3-year bond last week, which had 31 billion euros outstanding, according to Bloomberg data.

Bond yields are on the rise globally, in part due to spillovers from the U.S. where an already solid economic recovery is set to be further underpinned by $1.9 trillion of additional fiscal stimulus program. The Federal Reserve has taken a relaxed view, with officials saying the moves reflect greater optimism about the recovery.

That’s testing central banks elsewhere, concerned that their own economies haven’t healed enough to cope with higher borrowing costs.

While optimism is also growing in the U.K. thanks to a rapid vaccination campaign, the European Union is still firmly in the grip of the pandemic, and governments are advancing only slowly with immunizing their populations.

The euro area’s fiscal support is also smaller than in the U.S., and a breakthrough recovery fund won’t kick in until the middle of the year. The economy is forecast to contract this quarter, and the ECB expects any inflation spikes this year to be only temporary, with job losses and uncertainty damping price pressure.

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