Eurozone government bonds rallied and the continent’s stock markets trended higher after the European Central Bank pledged to speed up its asset purchases to deal with a jump in global borrowing costs.
The yield on Germany’s 10-year government bond — considered a regional benchmark — dropped 0.04 percentage points to minus 0.349 per cent as investors bought the debt. Italy’s equivalent bond yield fell 0.11 percentage points to 0.57 per cent.
The regional Stoxx 600 benchmark rose 0.5 per cent to 423.8 points, putting it within touching distance of its pre-pandemic high of 433.9 reached last February. Bourses in some of the bloc’s economically weaker nations outperformed: Italy’s MIB rose 1.3 per cent while Portugal’s PSI 20 gained 1.7 per cent.
The moves came after the ECB said it would tackle a rise in eurozone bond yields — pushed higher by a sell-off of US Treasuries driven by expectations of a jolt of inflation in the American economy — by speeding up its sovereign debt purchases under its pandemic emergency purchase programme (PEPP).
“The governing council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year,” the ECB said in a statement following its latest monthly meeting on Thursday.
This was “with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”.
Germany’s benchmark Bund yield has risen from about minus 0.55 per cent at the start of the year. This threatened to increase the borrowing costs of eurozone companies operating in nations where the rollout of coronavirus vaccines has been slow and economies are expected to take longer to recover than the US.
Ahead of Thursday’s meeting, investors had widely expected “some clarity of communication about this from the ECB”, said Juliette Cohen, strategist at Paris-based CPR Asset Management.
“The outlook for the eurozone economy is much weaker than that of the US because of the slower pace of coronavirus vaccine rollouts and the contrast in fiscal stimulus,” she added, referring to US president Joe Biden’s $1.9tn coronavirus relief package.
“Europe still needs monetary support and the recent hike in eurozone bond yields was unjustified.”
The euro was unmoved by the ECB’s announcement, however, adding 0.2 per cent against the dollar to purchase $1.195.
Philipp Burckhardt, fixed-income strategist at Lombard Odier, added that as yields dropped back in the eurozone, Treasuries would benefit because they offered more income. “The thinking is that if Europe commits to very low yields for a long time, US Treasuries are more attractive so lets switch some money into them.”