Rates Spark: Fuzzy Logic

The ECB announced a step-up in purchases. But its target remains as fuzzy as before and higher purchase volumes come with an expiry date. The disagreements within the governing council may raise the bar on future interventions. Near term, yesterday may prove bullish for bonds, but longer-term we see no need to adjust our bearish forecasts.

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Dovish ECB at first sight, ambiguous on the details

In the broad outlines, the ECB remains committed to its accommodative policy and reiterated that it will look through the temporary rise in inflation expected this year as economies reopen. The central bank’s macro assessment has not really changed as our economists write, but the subsequent press conference and media reports give the impression of a split Governing Council

Of course, bond markets were paying more attention to the ECB’s immediate response to the – in Christine Lagarde’s own words “undesirable” - increase in bond market yields. At first sight, elevating the announced increase in the pace of PEPP buying into the policy statement was a dovish surprise. What the ECB actually targets though when stating its aims to maintain favourable financing conditions remains as fuzzy of a concept as before.

A Reuters report later also confirmed that policymakers had different views of the desirable level of yields. The initial drop in Bund yields faded over the course of the press conference.

Italian bonds were the clear winner yesterday

But bond yields are only part of the ECB’s “holistic” and “multifaceted” approach to measuring financing conditions - to be precise, one of the upstream factors (readers may also want to refer to chief economist Philip Lane's speech on the topic for detail).

At least President Lagarde’s insistence that spreads were equally important made Italian bonds the clear winner yesterday with the 10-year spread over Bunds tightening by more than 6 basis points. If the ECB is explicitly not engaged in yield curve control, then maybe “spread control” comes closer to describing the strategy.

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