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The hawkish policy, the court will check the debt market of the ECB and the euro

© Reuters. FILE PHOTO: Experts working on cranes in front of the European Central Bank (ECB) in Frankfurt, Germany

(Story reference to correct typos in chart; no changes to text)

By Dhara Ranasinghe and Stefano Rebaudo

LONDON / MILAN (Reuters) – Politicians, courts and policy advocates of the Eurozone will pose a stiff challenge this year to the ECB’s determination to reduce borrowing costs. of the bloc, precisely at a time when higher US Treasury yields are attracting investors out of the European market.

The European Central Bank has kept government debt yields low through buying bonds and has recently increased buying into an emergency stimulus program worth 1.85 trillion euros (2.22 trillion USD). , called PEPP.

And it is no longer fighting alone to support the euro economy, as the pandemic has caused governments to spend more and create a recovery fund worth 800 billion euros, created from general borrowing. of the European Union.

However, the urgent appeal in Germany’s highest court caused the approval of the fund to be halted. The court will decide in the coming weeks on the lawsuit brought by five plaintiffs, including the former leader of the far-right party to replace Germany.

Given how poorly Europe’s recovery is in the US, the delay in the fund could mean “economic disaster,” warned ECB board member Isabel Schnabel.

That is most worrying for poorer Southern European countries, which have benefited the most from disbursement. Their borrowing costs fell last year as a result of their deal with the Recovery Fund seen as a mitigating risk to their economy, but yields have started to rise due to concerns that support for platforms This economy may not come soon.

Italy alone can receive a total of 250 billion euros from the fund, Credit Switzerland (SIX 🙂 estimated.

Guy Miller, director of market strategy at Zurich Insurance Group (OTC 🙂 said: “(ECB) has done enough, but the game is not over yet. “They have to stay on the alert, and they’ll have to make sure to keep fighting.”


Miller said investor demand for 50-year bonds recently issued by Italy and Austria is strong, demonstrating confidence in ECB’s support.

But Spain and Portugal’s 10-year yields have risen 15 bps each since fund approval was halted. Italy’s 10-year yields are close to a six-week high, and their premium relative to Germany is close to its highest since early March.

These moves are modest compared to last year’s pandemic-related turmoil, historically low yields and won’t feel pain for years. Berenberg analysts estimate that Italy, with an average debt maturity of 7 years, will feel the impact of higher borrowing costs after 2025.


Ross Hutchinson, a fund manager at Aberdeen Standard Investments, said while 10-year yields in Southern Europe between 0.4% and 0.8% offer little compensation for the risk, it’s hard to go the opposite. the support of the ECB.

But that step backward will come under pressure from the common hawks in the ECB; Dutch central bank chief Klaas Knot has urged a return to PEPP this year.

The recovery fund’s hurdles and the diminishing ECB debate “are real concerns, underestimated by the market,” Hutchinson said.

The ECB net bought 17.1 billion euros according to PEPP last week, compared with 10.6 billion euros last week. But they agreed at a meeting in March to pre-purchase, on the condition that it would be reduced to purchases later if conditions permit.

KJ Sinha, a fund manager at Canada Life Asset Management, said as growth and inflation expectations improve around the end of the year, “that’s when (ECB) starts talking about reducing purchases. and things can get complicated. “


Investors like Cosimo Marasciulo still prefer Italian debt, thanks to the ECB’s support and the “Draghi effect” – a reference to trusted former ECB director Mario Draghi, who is currently the prime minister of Italy.

But with the 10-year Treasury yield of 1.62%, the U.S. traction is strong.

“If you buy the 10-year Treasury and cover it in euros, you’ll get around 20 bps against the Italian BTP. If you look at it over the last 5 years, this is the highest we have. Marasciulo, head of the absolute fixed income division at Amundi, said.

Similarly, a 10-year Treasury note that hedged currency hedging in a three-month contract provided yields roughly the same as Greece by about 0.88%, Saxo Bank strategist Althea Spinozzi estimates. count.

Foreigners hold 30% of Italian debt, but about half of the market in Spain and Portugal and nearly 90% of Greek bonds, making these markets particularly vulnerable to “revolving risk” if Treasury bond yields rose even more, she said.

“Foreign investors are certainly starting to see that, given rising yields in the United States, holding debt from the periphery presents a more significant downside,” said Spinozzi.

(1 dollar = 0.8351 euro)



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