ECB Calms Worries On Bond Purchases; Investors Now Await The Fed

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Greece joined the club of eurozone countries sporting negative bond yields as its five-year bond dipped below zero on Monday. It is hardly an exclusive club—Italy is now the only eurozone sovereign borrower with positive yields on its five-year bond.

The European Central Bank’s commitment last week to maintain a high pace of bond purchases no doubt emboldened investors to buy the Greek paper. The ECB dispelled fears that a burgeoning economic rebound would prompt it to pull back on its €1.85 trillion emergency bond purchase program.

The move on Greek yields came as the European Union started the sale of its first bond in the bloc’s economic recovery plan, which foresees borrowing up to €800 billion by 2026 to back grants and loans to member countries to recover from the COVID-19 pandemic.

That 10-year bond is expected to raise €10 billion and will be priced to yield 0.1%, according to Reuters’ calculations. This initial issue comes on the heels of €90 billion in EU bonds to fund its SURE program for unemployment aid.

With the EU on course to borrow €80 billion in long-term debt for the recovery program this year, the new issues will add liquidity to the market, as investors hope the EU will become a regular borrower.

At its policy meeting last week, the ECB governing council said it would maintain its bond purchases, which include corporate bonds as well as sovereigns, at €80 billion a month.

On Monday, executive board member Isabel Schnabel suggested the central bank should prioritize green bonds in its purchases. It is not enough to exclude emission-intensive companies to motivate them to reduce emissions while maintaining a policy of market neutrality otherwise. Companies that contribute to climate change are overrepresented in the bond market because they have higher capital needs.

Schnabel’s comments fit in with the ECB’s overall strategy of using its resources to combat climate change.

In the U.S., yields on the benchmark 10-year Treasury note rose to about 1.5% on Monday after dipping as low as 1.43% Friday, as investors positioned themselves for the Federal Reserve’s monetary policy meeting this week.

Fed policymakers are expected to keep policy very accommodative, but investors will be looking to see whether the economic forecasts from individual FOMC members will show higher inflation and perhaps an earlier target for raising interest rates. The last set of economic projections, in March, indicated the benchmark Fed rate would remain near zero through 2023.

Economists are divided in their opinions about inflation. Many agree with the Fed that current increases in inflation—the consumer price index released last week showed a year-on-year gain of 5%—is transitory, because of depressed prices a year ago and temporary shortages in the wake of COVID-19. Others, however, see higher inflation as a longer-lasting trend, with implications for interest rates.

In any case, Fed Chairman Jerome Powell will have to be extremely cautious in what he says at his press conference Wednesday to avoid alarming nervous investors that the Fed is considering a lower pace in bond purchases anytime soon.

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