ECB Undid a Fail But Left Collateral Damage
The central bank was right to revise its response to the coronavirus. But policy u-turns damage bond liquidity just when governments need a well-functioning market.
Christine Lagarde, president of the European Central Bank, unveiling the central bank’s first response to the coronavirus crisis.
Photographer: Bloomberg
The wild swings in bond values in recent weeks have undermined investor trust in the fixed-income markets just when governments need them most as they scramble to protect their pandemic-afflicted economies. While the European Central Bank’s new 750 billion euro ($820 billion) bond-buying program gets the institution where it needs to be in supporting the euro zone, the collateral damage of prior false starts may endure.
ECB President Christine Lagarde last week told the world “we are not here to close spreads,” prompting Italian bond yields to shoot higher. This week, she said there are “no limits” to what her institution will do to safeguard the common currency project. Italian yields have duly plummeted.