Eurozone government bonds rebounded and the continent’s stock markets showed a higher trend after the European Central Bank pledged to accelerate its asset purchases to accommodate a rise in global financing costs.
The yield on Germany’s 10-year government bond – considered a regional benchmark – fell 0.04 percentage points to minus 0.349 percent as investors bought the debt. Italy’s equivalent bond yield fell 0.11 percentage point to 0.57 percent.
The regional Stoxx 600 benchmark rose 0.5 percent to 423.8 points, putting it within reach of its pre-pandemic high of 433.9 reached last February. Stock markets in some of the bloc’s economically weaker countries fared better: Italy’s MIB rose 1.3 percent, while Portugal’s PSI 20 rose 1.7 percent.
The measures came after the ECB said it would address an increase in eurozone bond yields – higher due to a sell-off of U.S. Treasuries, driven by expectations of an inflation shock in the U.S. economy – from purchases of government debt during the pandemic to speed up. Emergency Purchase Program (PEPP).
“The government council expects purchases under the PEPP to take place at a significantly faster pace in the coming quarter than during the first months of this year,” the ECB said in a statement following its last monthly meeting on Thursday.
This was “to avoid a tightening of financing conditions inconsistent with counteracting the pandemic’s downward impact on the expected inflation path”.
The German benchmark return on Bunds has risen from around minus 0.55 percent at the start of the year. This threatened to increase the borrowing costs of Eurozone companies operating in countries where coronavirus vaccine rollout has been slow and economies are expected to take longer to recover than in the US.
In the run-up to Thursday’s meeting, investors had generally expected “some clarity in the ECB’s communication on this,” said Juliette Cohen, strategist at CPR Asset Management in Paris.
“ The outlook for the eurozone economy is much weaker than that of the US due to the slower pace of coronavirus vaccine introduction and contrast in fiscal stimulus packages, ” she added, referring to the US president’s coronavirus package Joe Biden of $ 1.9 billion.
“Europe still needs monetary support and the recent rise in eurozone bond yields was not justified.”
However, the euro remained unmoved by the ECB’s announcement, adding 0.2 percent against the dollar to buy $ 1,195.
Philipp Burckhardt, fixed income strategist at Lombard Odier, added that as interest rates in the eurozone fell, Treasuries would benefit as they offered more income. “The idea is that if Europe is committed to very low interest rates for a long time, US Treasuries will be more attractive, so let’s trade some money into them.”