ECB still in wait-and-see mode as yields rise

FRANKFURT (Reuters) – The European Central Bank is monitoring the recent surge in government borrowing costs but will not target specific levels in bond yields or mechanically react to market moves, two ECB policymakers said on Friday.

Government bond yields around the world have rebounded from some of their lowest levels in history in recent weeks, mostly reflecting expectations of faster price growth in the United States.

Investors have been pondering at what point the ECB will increase the pace of its bond purchases to rein in yields, in keeping with its pledge to maintain financing conditions favourable for pandemic-stricken governments, companies and households.

Verbal intervention by ECB President Christine Lagarde last week failed to stem the bond selloff. Then Chief Economist Philip Lane’s and fellow board member Isabel Schnabel tried to calm investor nerves. But both inserted caveats in their messages.

“At this stage, an excessive tightening in yields would be inconsistent with fighting the pandemic shock to the inflation path,” Lane said in an interview with Expansión.

“But at the same time, it is crystal clear that we are not engaged in yield curve control, in the sense that we want to keep a particular yield constant”.

Lane added that while inflation was indeed recovering, the increase was not yet what the ECB was looking for after a decade of undershooting its target.

Ten-year Bund yields, a key benchmark for the 19-country euro zone, now yield -0.223%, up from around -0.60% at the start of the year.

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

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

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

“Even gradual increases in real yields may not necessarily be a cause of concern if they reflect improving growth prospects.”

(Reporting by Balazs Koranyi and Francesco Canepa; editing by Shri Navaratnam, Ana Nicolaci da Costa, Larry King)