Eurozone bonds shaken by central bank moves

[LONDON] Eurozone government bond yields rose on Thursday (Dec 16) after the Bank of England (BOE) delivered a surprise rate rise and the European Central Bank (ECB) cut stimulus, but the bonds sell-off was limited as the ECB pledged to continue monetary support in 2022.

Bond yields, which move inversely to their price, shot up when the BOE raised rates by 15 basis points less than hour before the ECB's confirmed its emergency stimulus programme would end next March.

Once its pandemic emergency bond purchases (PEPP) expires, the ECB said it would buy 40 billion euros (S$61.7 billion) of bonds under its conventional bond purchase programme, the APP, in the second quarter, and 30 billion euros in the third quarter.

From October onwards, purchases will be maintained at 20 billion euros, the current level, for as long as necessary.

The ECB also extended the re-investment of the proceeds from the bonds it currently holds under PEPP until end-2024, from 2023.

While analysts were divided in seeing the purchase amounts as hawkish or dovish, markets appeared to focus on a dovish interpretation.

Germany's 10-year Bund yield, which rose as much as 5 basis points (bps) to -0.309 per cent as ECB president Christine Lagarde spoke, was last up just 2 bps to -0.34 per cent, at pre-ECB levels.

Italian 10-year yields rose as much as 10 bps to 1.02 per cent before pulling back to 0.98 per cent, also undoing much of their sell-off.

"I thought the sell-off, (particularly) in the periphery, was exaggerated," Arne Petimezas, analyst at AFS Group in Amsterdam, said. "People had been hoping too much for spread control to continue 1-to-1 after March 2022. Instead, we're getting a little more APP (purchases) than I expected. And a strong signal that the bar is very high for an interest rate hike in 2022."

European shares were little changed after the ECB policy statement and throughout Lagarde's news conference. The STOXX 600 index was last up 1.3 per cent.

The euro rose to a 2-week high versus the US dollar after the ECB meeting, to stand 0.3 per cent up on the day at US$1.13280.

REUTERS