Holders of European government bonds nursing losses of almost 3 percent since the end of May are getting no respite from central-bank officials who see the selloff as vindication of their quantitative-easing plan to stimulate growth.
Euro-area sovereign securities have more than wiped out their 1.3 percent gain from the first five months of the year as inflation returned to the region and European Central Bank President Mario Draghi displayed a benign attitude to rising yields. He also signaled that officials were comfortable with heightened volatility, a message reinforced by colleagues including ECB Executive Board member Benoit Coeure, who said Wednesday “the ECB does not intend to counter that volatility in the short term.”
“The ECB started QE not on the basis of getting the bund yield down -- it was already very low -- it was purely about the threat of deflation and repairing its broken transmission mechanism,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London.
The yield on Germany’s 10-year bunds, the euro area’s benchmark sovereign securities, has surged about 1 percentage point since reaching a record-low 0.049 percent as recently as April 17. The yield was at 0.98 percent as of 2:29 p.m. New York time, having earlier touched 1.06 percent, the highest level since Sept. 19.
A slump in the nation’s 30-year bonds, perceived to be sensitive to investors’ outlook for inflation, pushed the yield on the securities up to 1.79 percent on Wednesday, the most since Nov. 7.
While Coeure, in an interview with French newspaper La Croix published on the ECB website Wednesday, said the central bank “will not allow excessive fluctuations” to threaten price stability, he said attempts to mute volatility “would effectively give market participants a free insurance policy.”
That followed June 8 comments by Governing Council members Christian Noyer, who said policy makers “aren’t there to guide every basis point up and down,” and Ewald Nowotny, who described higher yields in the region as a “success story.” Nowotny said economic developments in Europe were positive, with asset purchases having the desired effects. Another council member, Erkki Liikanen, said the central bank is committed to the 1.1 trillion-euro ($1.2 trillion) bond-buying program.
“We don’t see an obvious jump into verbal intervention yet,” said Credit Agricole’s Green. “They will not be too keen to intervene unless they feel they have to. Certainly we haven’t reached their pain threshold in this regard.”