ECB Still Hasn’t Activated First Line of Defense in Bond Market

(Bloomberg) — The European Central Bank still hasn’t activated the bond-purchasing firepower signed off by policy makers more than a week ago as their first line of defense in a crisis, according to people familiar with the matter. 
Some officials worry that until the decision to “apply flexibility” to reinvestments from its pandemic emergency program becomes operational, debt markets remain vulnerable to investor speculation that could then spiral out of control, the people said. They declined to be identified because such discussions are private. The availability of pandemic reinvestments has been touted as an initial crisis-fighting tool since December last year, though the ECB didn’t choose to resort to that option until an emergency meeting on June 15. Another scheduled Governing Council gathering took place on Wednesday. 

An ECB spokesperson declined to comment on preparations to make the measure operational.

While President Christine Lagarde assured European lawmakers earlier this week of progress on implemention, she gave no commitment on when it would be completed, saying only that “we will do that, and the technicalities and the ways in which this shall be conducted is actually being worked on as well at the moment.”

The use of reinvestments is intended as an immediate solution while the ECB develops a more potent crisis instrument, commonly referred to by officials as an anti-fragmentation tool. Policy makers aim to have that ready by the July 21 meeting, though they say it could be deployed sooner if required.

Italian bonds pared gains, sending the 10-year yield premium over its German peer seven basis points higher to 198 basis points, the highest since Friday.

July 1

The ECB is committed to reinvesting maturing securities from its bond portfolios, but the tempo of its intervention in the market is already scheduled to slow on July 1, when conventional quantitative easing will end.   

Conceivably, using reinvestments of the pandemic tool could already offer a powerful support to individual countries, especially if the ECB can waive its usual constraint that bond-buying should reflect the size of each economy.  

About 17 billion euros ($17.9 billion) of bonds expire each month and about 12 billion euros of that comes from core countries and could be redirected to struggling markets, people familiar with their plans have said. 

The emergency meeting last week committed the ECB to using that measure and to developing a crisis tool to protect the integrity of the euro. Officials convened after market tensions pushed Italian bonds above 4% for the first time in 2014, a time when the region was embroiled in sovereign debt turmoil.

In her testimony to the European Parliament on Monday, Lagarde referred to some possible areas of study in developing its anti-crisis measures, while also declining to comment further. 

“I know that it is going to be terribly tempting by many of you and all the best ones in this room to actually ask me, what kind of band, what kind of spread, what kind of speed, what kind of measurements, what kind of criterias, what kind of framework will eventually be decided, and I will not, I simply will not” respond, she said. 

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