The eurozone bond market was rattled on Tuesday by concerns that the European Central Bank might be contemplating how to scale back its quantitative easing programme, sending yields sharply higher and contributing to the worst day for gold in over a year.
The euro also jumped higher versus the dollar after Bloomberg reported — citing unnamed officials — that the ECB might wind down its bond purchases in steps of €10bn a month. The ECB’s €80bn monthly current QE programme is due to end in March 2017.
An ECB spokesperson told the Financial Times that the ECB’s Governing Council “has not discussed these topics, as President Mario Draghi said at the last press conference and during his recent testimony at the European Parliament”, and the Bloomberg report stated that policymakers might still extend the whole bond-buying programme.
But given how most investors have expected the ECB’s monetary stimulus to be extended and perhaps even enlarged, even the discussion on how it might eventually be gradually scaled back sent shivers through the eurozone government bond market.
The 10-year government bond yields of Germany, France, Italy and Spain all jumped about 4 basis points, the euro clawed back its earlier losses to trade flat on the day at $1.1205 and the price of gold — which has been buoyed by central banks pushing interest rates and bond yields into negative territory — deepened its decline to 3.3 per cent.
If the ECB does decide to trim its €80bn a month QE programme in €10bn steps then it would mirror the Federal Reserve’s strategy in unwinding its own bond-buying programme in 2013. That initially caused a sharp jump in US bond yields, and Janus Capital’s Bill Gross said on Twitter a similar ECB “taper tantrum” was now also under way.
Barclays’ economists predicted that the ECB would choose to purchase less than €80bn of assets a month after its March meeting, but stressed that the central bank would “need to manage communication carefully to explain that reducing the amount of monthly purchases while maintaining it for an undefined but long period is not tapering. Firmer QE forward guidance could help to address market perceptions of tapering.”
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Nonetheless, any formal talk on whether to extend — or taper — asset purchases is yet to begin and a decision to reduce asset purchases remains far from the baseline scenario. Neither the ECB’s governing council nor its executive board, composed of the bank’s top six officials and headed by president Mario Draghi, has discussed the matter yet.
The council is currently meeting in Frankfurt, but the topic of QE is not on the agenda. The ECB is expected to make a decision on how it plans to continue with QE past the current end date of March 2017 around the turn of this year. Committees of eurozone central bankers are working on ways that the design of the programme could change to compensate for a scarcity of eurozone government bonds that are eligible for the ECB to buy.
David Joy, chief market strategist at Ameriprise Financial, said markets were most likely misinterpreting Bloomberg’s story as a hint of an upcoming tapering, rather than simply as a discussion of how the ECB will eventually scale back the programme, most likely instigated by some of the more hawkish officials.
“It’s had a pretty significant impact on markets, but the ECB is just saying what they will do when they want to end the programme, and they’re probably nowhere near that,” he said.