Euro zone bond yields fall, markets digest ECB's inflation target change

German 10-year yields, the euro zone benchmark, were down 4 basis points to -0.33%

  

Euro zone bond yields fell further on Thursday as a global bond rally continued, though there was little reaction to the European Central Bank’s decision to adopt a symmetrical inflation target.

In a widely expected decision, foreshadowed by policymakers, the ECB set its inflation target at 2% in the medium term, ditching a previous formulation for "below but close to 2%," which created an impression the euro zone's central bank worried more about price growth above its target than below it. 

The adoption of the symmetrical inflation target - where a central bank responds to inflation undershoots as well as overshoots – triggered little impact on euro area borrowing costs, which are pinned down by the ECB’s monetary support.

“It was already clear what they were going to do,” Arne Petimezas, analyst at AFS in Amsterdam said of the lack of market reaction.

Although the ECB said its target would be symmetric, it made no specific reference to tolerating an inflation overshoot after long periods of ultra-low price growth, a possible disappointment for investors who were looking for such a commitment that would ensure stimulus well into the recovery.

Louis Harreau, ECB strategist at Credit Agricole CIB, said the decision was slightly more “hawkish” than he expected.

He had expected “something more committing, like an explicit compensation for past under-shooting,” Harraeu said. Bond yields in the euro area continued to fall on Wednesday, in line with a global bond rally led by Chinese and U.S. government bonds.

German 10-year yields, the euro zone benchmark, were down 4 basis points to -0.33% by 0738 1128 GMT, led by U.S. Treasuries, where 10-year yields were down nearly 5 basis points. 

Italian bond yields lagged and 10-year yields rose a basis point, pushing up the risk premium on Italian bonds - a key beneficiary of ECB stimulus - widened to 108 bps, the widest since June 21. 

Focus is on additional clues ECB President Christine Lagarde may provide at a news conference at 1230 GMT.

"It could even come as a disappointment if (ECB President Christine Lagarde) doesn't make any further dovish soundbites or if they stop at that,” said Antoine Bouvet, senior rates strategist at ING in London.

Focusing on how the target might be achieved, UniCredit analysts are looking to see whether the ECB would allow its conventional asset purchases to deviate from self-imposed rules on how much of each issuer's debt it can buy - a flexibility that defines its pandemic emergency bond purchases, which are expected to slow later this year and expire in 2022.

In addition to the revision of its inflation target, the ECB will also incorporate climate change considerations into its monetary policy, including on disclosure, risk assessment, and decisions on collateral and corporate sector asset purchases.

Market participants say this week’s bond rally is a result of hedge funds unwinding bets on rising U.S. Treasury yields once the 10-year benchmark fell below 1.40%.

(Reporting by Yoruk Bahceli; Editing by Angus MacSwan and Raissa Kasolowsky) ((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: yoruk.bahceli@thomsonreuters.com))


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