European government bonds from Italy to Greece surged after the European Central Bank launched a 750 billion euro ($810 billion) debt-buying program to keep borrowing costs in check as countries prepare to increase spending to counter the impact of the coronavirus.
Yields plummeted, led by a more than 200-basis-point drop for Greece’s five-year bonds, narrowing the gap between the debt of the euro-area’s strongest economies and the more stressed. The region’s corporate debt risk dropped the most since 2016 following the ECB decision, made in an unscheduled meeting Wednesday evening.
The Bank of England followed Thursday with its second emergency cut in borrowing costs this month, taking the benchmark rate to a record-low 0.1%. The BOE also announced a boost in its asset-purchase program target to 645 billion pounds ($752 billion), made up mainly of gilts.
The two decisions mark the latest in an escalating global response to an outbreak widely seen driving the economy into recession. ECB President Christine Lagarde reinforced the message that policy makers will do all they can, saying there are “no limits to our commitment to the euro.”
The program brings the total of the ECB’s planned bond purchases this year to 1.1 trillion euros, its biggest annual amount ever.
“The ECB was forced to react quickly,” Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, wrote in a note to clients. “The new envelope of 750 billion euros should help bring in spreads more lastingly, but it is questionable whether this will be the turning point of the broader financial market rout.”
European stocks fluctuated between gains and losses on Thursday, with the Stoxx Europe 600 Index trading 2.5% higher at 3:47 p.m. in London. The euro fell as much as 1.7% to $1.0726, the lowest level since 2017. Two-year gilt yields dropped 16 basis points to 0.18%, the most since the Brexit referendum result in 2016.
Read more: ‘Discombobulated’ Gilt Market Gets Wish After BOE Resumes Buying
European officials are weighing activating a regional bailout fund to help nations with strained public finances. Investors have been pushing up bond yields as they fret about the cost of the massive fiscal response to the pandemic. Italy, which already has a huge debt burden and is the worst-affected by the disease, is especially hard hit.
The ECB last week agreed to pump more liquidity into the financial system and joined other central banks in a bid to ease a funding squeeze. The measures on Wednesday include:
Buying public and private-sector securities until at least the end of 2020Program will cover all assets eligible under current quantitative-easing program, and will be extended to commercial papers of sufficient credit qualityGreek government debt will be includedCollateral standards will be easedProgram will continue until ECB judges the crisis phase of the pandemic to be over, but not before the end of this yearThe ECB will consider raising its self-imposed limits on QE holdings, and will increase the size of its programs if needed
While the package was broadly welcomed, many said more needs to be done, particularly from governments.
“We think we still need further fiscal easing and indications of absorbing private credit risk to stabilize financial markets more durably,” said Ebrahim Rahbari, Citigroup’s global head of currency analysis.
Some ECB policy makers are unhappy that this week’s emergency bond-buying plan could require them to raise the limits on how much debt the institution can hold, according to people familiar with the matter.
While Governing Council members were unanimous that they needed to act to calm market turmoil, there were some reservations about the implications of the program, the people said. They asked not be named because the meeting was private.
In its statement, the central bank said it “will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”
Venturing into the commercial-paper market is a novelty for the institution. In doing so, policy makers are taking a page out of the Federal Reserve’s book.
The decision to consider raising the limits on QE holdings could be controversial. The caps, set at the start of the program in 2015, are meant to address concerns the central bank would breach European Union law by financing governments.
Lagarde’s predecessor, Mario Draghi, argued last year the Governing Council could loosen standards if economic circumstances warrant it. Taking that step in the immediate future faces one key complication — a German constitutional court ruling on the legality of QE is just weeks away.
“Within the realm of what monetary policy can do, the ECB is now seriously tackling the two key issues facing economic policymakers,” said Holger Schmieding at Berenberg. “Easing the liquidity crunch in the economy and helping governments to finance their response to the health emergency.”
Wednesday’s announcement came hours after French Finance Minister Bruno Le Maire called on the ECB to intervene “quickly and massively” using all its instruments.
If euro-area officials were to activate the region’s bailout fund, that would be a crucial step toward triggering the ECB’s most powerful bond-buying power — Outright Monetary Transactions. That program was designed during the bloc’s debt crisis in 2012 to purchase the debt of specific nations.
It grew out of Draghi’s “whatever it takes” pledge, but has never been used.
(Updates with BOE decision in third paragraph, price updates throughout)
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