Photo: Bloomberg LP
It’s been less than a year since European Central Bank (ECB) Governor Christine Lagarde was forced to take a step back after her comment that “we’re not here to close spreads” has shaken the bond market. But because of rising U.S. government yields raising interest rates on loans in Europe, intervention may be needed, Bloomberg columnist Marcus Ashworth said.
Thanks to a nearly 8-year peak in commodity prices, growing fiscal support from governments, and hopes that the blockades will successfully end with the success of vaccines, yields on 10-year U.S. bonds have risen to a one-year high. Yields on 30-year German bonds moved to positive territory, reaching 0.2% from -0.2% in just three short months.
This certainly frightened the central bank. “The ECB is closely monitoring the development of long-term bond yields,” Lagarde said on Monday. As Jim Ryde of Deutsche Bank AG pointed out, it is impressive that bankers feel motivated to intervene when yields on 10-year German bonds (bonds) are still negative.
And while the ECB is understandably concerned about the debt market, the US Federal Reserve is not worried about it. “In a sense, it’s a declaration of confidence in part of the market that there will be a strong and fully completed recovery.” said Governor Jerome Powell before the Senate on Tuesday asked about rising profitability. But given the strong outlook for U.S. economic growth, he can afford to be calmer than his eurozone counterparts.
The ECB has enough flexibility in its 1.85 trillion bond program. increase purchases and focus its support on long-term debt. But a bank can acquire bonds with a maturity of up to 31 years, even though European governments, as well as the European Union, issue even longer-term debt – up to 50 and even up to 100 years.
As the € 750 billion economic recovery package agreed last summer has to be paid, there is a growing need to sell rising debt with overdue maturities. And with 50-year EU bonds already yielding 0.44%, even though it was in negative territory in December, rescue is no longer free. So yes, Frankfurt, we have a problem.
Any measure to curb the jump in profitability would be dangerously close to formal supervision, which the ECB will not want to take, as the scope of its powers was once tested by the German Constitutional Court. For now, the central bank will limit itself to trying to reduce profitability in words. But as with all attempts to influence the market, the ECB will have to show at some point that its words carry weight.
By introducing a new and somewhat vague emphasis on maintaining favorable financial conditions this year, at least until the end of the crisis, the central bank has carefully freed up space for action. While this includes corporate lending spreads, the price of the euro, loan interest rates and other indicators, the most important component is still the yield on government bond benchmarks. At this stage, it remains the easiest parameter to monitor market participants.
The speed of European government bonds caught the market unprepared. Analysts polled by Bloomberg did not expect German federal banks to reach their current level at least by the end of the year.
Both the recent appreciation of the euro, caused mainly by the depreciation of the dollar, and interest rates are affected by an impact that is largely beyond their control. After the worst economic collapse in history, Europe’s recovery is threatened by higher long-term borrowing costs.
The ECB is working to convince markets that it has enough firepower to support a traditionally weaker economy. And if the so-called reflation trade continues to jeopardize its efforts, the bank may be forced to start controlling the yield curve.