Euro zone yields edge higher after ECB statement

The bloc's borrowing costs tracked U.S. Treasury yields, falling in early London trade after an auction of 20-year bonds showed strong demand on Wednesday

Euro currency bills are pictured at the Croatian National Bank in Zagreb, Croatia, May 21, 2019. Picture taken May 21, 2019.

Euro currency bills are pictured at the Croatian National Bank in Zagreb, Croatia, May 21, 2019. Picture taken May 21, 2019.

REUTERS/Antonio Bronic

MILAN - Euro zone government bond yields edged higher after a policy statement from the European Central Bank on Thursday, with investors looking for clues during the ECB news conference on how it would react to an expected economic recovery.

The ECB left policy unchanged as expected on Thursday, keeping copious stimulus flowing even as it faces questions over how it might claw back support once the pandemic-stricken euro zone economy reopens. 

The ECB will likely be pressed on signs of divisions over the future pace of bond purchases, which have been stepped up recently to prevent a rise in borrowing costs from derailing the recovery. 

Germany's 10-year government bond yield, the benchmark for the euro area, rose 0.5 basis points to -0.25%.

ECB President Christine Lagarde said recently the European economy was still standing on "crutches," and stimulus could not be withdrawn. 

"The focus at today's ECB press conference looks set to turn to the reduction and eventual winding down of the PEPP (Pandemic Emergency Purchase Programme) purchases," Commerzbank analysts told clients.

According to Mohammed Kazmi, portfolio manager at Unione Bancaire Privee (UBP), Lagarde will "remain consistent with her dovish comments despite what we see as an improving outlook."

Some analysts have recently flagged concerns about a possible "hawkish mistake" by the ECB in June following good news about the European economy.

"The ECB is unlikely to dismiss the possibility of taper in June, likely leaving our bearish tactical bias intact," Citi analysts said.

"We doubt that ECB President Christine Lagarde will provide any meaningful indications today," Unicredit analysts said. "The outlook is just too uncertain for Ms. Lagarde to start steering market expectations at this stage."

"The decision on what to do with the PEPP after March 2022 is likely to be taken in September," according to Unicredit.

Italy's 10-year yield rose 1.5 basis points to 0.78%, with the risk premium on top of German bonds widening to around 102 basis points.

Despite concerns about the ECB's possible exit from the purchase programme, "prospects for the periphery are improving near-term. The rejection of the preliminary injunction against NGEU (EU pandemic recovery fund) by the German Constitutional Court was a surprise," Commerzbank analysts added.

Germany's constitutional court declined on Wednesday to block the recovery fund, but it did not indicate when it would rule on the full complaint against the fund. 

France and Spain will be in the primary market with auctions, with analysts expecting supply to be absorbed well.

(Reporting by Stefano Rebaudo. Editing by Gareth Jones) ((; +390266129431;))

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