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The ECB is considering a new bond-buying program to prevent turmoil in the bond market, according to reports Bloomberg. This new programme is intended to replace not only the regular purchase programme, but also the Pandemic Emergency Purchase Programme (PEPP). The latter support programme was launched during the corona crisis, but will expire at the beginning of next year. To prevent government bond yields from skyrocketing again, the central bank wants to keep a new program in reserve.
The European Central Bank has been adding government bonds to its balance sheet since 2015. Since then, she has more than €3.2 trillion of debt securities. Initially, the central bank bought government bonds according to a fixed key. The purchases of support were proportional to the size of the different economies in order to ensure market neutrality.
That all changed with the outbreak of the corona pandemic at the beginning of last year. At that time, the ECB announced a New buy-back program with which it moved away from the fixed distribution key. Since then, the central bank has not only bought much more government bonds, but also proportionally much more from the southern euro countries. As a result, interest rate differentials between euro area countries have continued to decline since then.
Interest rate differential between Germany and Italy has narrowed further since corona crisis
The new asset purchase program would also not have a fixed distribution key, giving the central bank more room to support specific countries. This is politically sensitive, because it would distort the market. In this way, the central bank would turn off the interest rate signal, which is normally indicative of the risk. At the time of writing, the yield differential between German and Italian bonds is around 107 basis points. This is still relatively little, but it is more than in the years before the credit crisis.
In recent weeks, government bond yields have continued to rise, both in the United States and in Europe. Investors are demanding a higher interest rate due to persistently high inflation. Prices have not risen as fast as they do now on both sides of the ocean in the past ten years. According to central banks, high inflation is a temporary phenomenon, but not all investors are convinced.
Central banks are currently in a difficult situation. Inflation has been well above target in both the US and Europe for some time. Normally, that would be a reason to tighten monetary policy and raise interest rates, but there are no indications of that yet. If inflation stays at this high level for longer, it will be beneficial for gold. When inflation is high, real bond yields fall, making the precious metal a more attractive alternative.
This contribution was made from Geotrendlines
