The European Central Bank’s governing council will hold an unscheduled meeting to discuss the recent sale in government bonds, which have risen sharply after announcing plans to raise interest rates from record levels.
That rate-setting panel will convene on Wednesday “to discuss current market conditions”, according to an ECB spokesperson. A person familiar with the matter said the meeting would start at 11 am Frankfurt time. A statement may follow.
The announcement comes this week after the yield on Italy’s 10-year debt rose above 4% for the first time since 2014. Investors are so far unconvinced that the ECB could raise borrowing costs to counter unprecedented euro-zone inflation, while also stifling yields among the bloc’s most vulnerable members.
A possible 75 basis-point increase by the Federal Reserve later in the day could add to the panic.
Italian yields fell 29 basis points to 3.89% at Wednesday’s open, while the euro rose 0.6% to 1.0475 against the dollar and currency markets bet on a 50% rise in the half-point rate next month.
“The central bank needs to be concerned if investors cannot buy or sell bonds in secondary markets and issuers have to suspend funding,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank. “Unlike earlier episodes of chaotic market movements, however, inflation does matter this time. The ECB cannot put money on the problem simply because monetary tightening and higher rates are really needed.”
While government bonds have been bouncing around for some time, the ECB has so far only allocated reinvestment from its pandemic asset-buying program, which it considers unfair market turbulence.
Meanwhile, investors are looking for an additional means to tackle so-called fragmentation, and there was some disappointment when officials did not unveil one at their policy meeting last week.
While the Governing Council says it could produce a new tool quickly, it has been reluctant to reveal details, is convinced there is some benefit in doing so and is concerned that the market will immediately attempt to test its limits. can do.
Executive board member Isabel Schnabel – who is in charge of the ECB’s market operations – indicated on Tuesday evening that any response to bond-market panic will come when it is needed and will depend on the specific situation that authorities are facing. Does matter.
Although it pledged that the ECB would not tolerate “changes in financing conditions that go beyond fundamental factors and that threaten monetary-policy transmission,” a commitment to preventing fragmentation “has no limits.”
Those comments parallel former ECB chairman Mario Draghi’s famous 2012 promise to do “whatever it takes” to save the euro. Schnabel highlighted the ECB’s pandemic emergency procurement program and the OMT created under Draghi as examples of policymakers’ ability to respond to a variety of market stresses.
The bond storm comes with the ECB set to end eight years of negative rates with a “sustained” cycle of hikes planned from July and a possible half-point move in September. It plans to phase out net purchases under a longer-running bond-buying program early next month.
Several members of the Governing Council were to speak on Wednesday. Comments from Bundesbank president Joachim Nagel at 11:15 am in Milan have been rescinded, as has Bank of Spain chief Pablo Hernández de Cos at 2:30 pm.
Wednesday’s ad-hoc meeting was first reported by the Italian newspaper Corriere della Sera.