09 June 2022

FT: ECB to firm up plans to ward off bond market stress

The European Central Bank is this week set to strengthen its commitment to prop up vulnerable eurozone countries’ debt markets if they are hit by a sell-off, as policymakers prepare to raise rates for the first time in more than a decade.

The bulk of the 25 governing council members are expected to support a proposal to create a new bond-buying programme if needed to counter borrowing costs for member states, such as Italy, spiralling out of control, according to several people involved in the discussions. Even without a new scheme, the ECB already has an additional €200bn to spend on purchasing stressed government debt under its existing bond-buying programme. That €200bn would come from bringing forward reinvestments of maturing assets by up to a year.

Italian government debt rallied on Monday morning, pushing the yield on the country’s benchmark 10-year bond down as much as 0.1 percentage points to 3.3 per cent. The gap between Italy’s 10-year borrowing costs and those of Germany, a key measure of perceived financial risk in the euro area, fell from 2.14 percentage points at the end of last week to 2.07 percentage points. The spread rose last week to its highest level since a sell-off in southern European bond markets at the start of the pandemic in 2020.

Rate-setters, who meet in Amsterdam on Wednesday and Thursday, are likely to clash over when to stop buying more bonds. Some plan to call for purchases to be halted as soon as Thursday, several weeks ahead of schedule, although they concede that only a minority may support the idea. The bank is under pressure to react to record-high inflation, but has lagged behind its counterparts in the US and UK in tightening monetary policy. Many of the council’s hawks have accepted they will need to provide more support for bond markets to clear the way for being more aggressive in raising rates...

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