ECB still in Waiting as Yields Rise

The European Central Bank currently monitors the recent surge in government borrowing costs but without targeting specific levels in bond yields. That is also without mechanically reacting to market moves. This was a statement from two ECB policymakers on Friday.

In recent weeks, global bond yields have rebounded from their lowest levels, reflecting expectations of faster price growth in the U.S.

Investors wonder where the central bank will increase the pace of its bond purchases to rein in yields. This is in keeping with its pledge to maintain financing conditions favorable for governments, companies, and households affected by the pandemic.

Last week, ECB President Christine Lagarde verbally intervened and failed to stem the bond selloff. 

Chief Economist Philip Lane said in an interview, at this stage, an excessive tightening in yields would be inconsistent. That is with fighting the pandemic shock to the inflation path. 

But at the same time, it is crystal clear that they are not engaged in yield curve control. That is in the sense that they want to keep a particular yield constant, he continued.

While inflation was recovering, the increase was not yet what the central bank was looking for. That was after a decade of undershooting its target, Lane added.

Lane and Executive Board member Isabel Schnabel tried to calm investors’ worries but warned them in their messages.

Bund Yields

Ten-year Bund yields are a key benchmark for the 19-country eurozone. From around -0.60% at the start of the year, they now yield -0.223% up.

Schnabel reasserted that higher long-term real yields, which are adjusted for inflation, could choke growth in the early part of an economic recovery. Moreover, it would warrant a reaction by the ECB.

She said though that a gradual rise in bond yields would even be welcome. That is, if it reflected higher inflation expectations, showing the ECB’s stimulus is working.

For example, Schnabel said, a rise in nominal yields that reflects a growth in inflation expectations is a welcome sign. It is a sign that the policy measures are bearing fruit.

Even gradual growth in real yields may not necessarily be a cause of concern if they reflect improving growth prospects, she added.

Schnabel Says ECB May Need to Add Support 

Schnabel has also said that the ECB may need to boost its monetary support for the economy if rising government borrowing costs hurt growth.

Investors anticipate that a global rebound, fueled by a massive U.S. fiscal stimulus, will boost inflation. 

Concerns for the eurozone are that borrowing costs will rise by more than the economy can handle. This is because it endures a slow vaccine rollout and extended virus restrictions.

On Thursday, Chief Economist Philip Lane said that the central bank would use the flexibility of its emergency bond-buying program. This is to prevent any undue tightening in financial conditions.

Furthermore, President Christine Lagarde cautioned this week that the ECB is “closely monitoring” bond yields.