Once again, the European Central Bank intervention is needed

Once again, the European Central Bank intervention is needed

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  During next week's press conference, the ECB will not have any alternative other than increasing purchases under the Pandemic Emergency Purchase Programme to slow down the European sovereigns' selloff. In February, European sovereigns have lost around 1.2% in value which, excluded the selloff seen during the Covid pandemic last March, is the most since Donald Trump took office in January 2017. Even though yields remain at historic low levels, there is the risk that if they continue to rise, economic conditions will tighten in countries most affected by the pandemic, such as Italy and Spain.


Yesterday's selloff in European sovereign bonds indicates that without the European Central Bank's continuous support, funding cost in the euro area is destined higher, which is something the central bank cannot allow.

The rise in yields in the United States is provoking a selloff of European sovereigns. In the month of February, European sovereign bonds fell by 1.2%, the most since March last year and January 2017 when Donald Trump took office. This is a big move that could soon tighten economic conditions in the Euro area.

Source: Bloomberg.

The central bank's main objective is to maintain price stability and reduce differences in financing conditions among businesses and households in the euro area. To achieve these goals, the ECB has deployed several measures, ranging from setting key interest rates to purchasing European assets outright.

Although most of the Euro area's sovereign yields are still trading at historic low levels and many dived into negative territory at the end of last year, a fast widening of the spread versus the Bund in countries hardest hit by the pandemic might become a problem. Therefore, we expect the ECB to increase its bond purchases under the Pandemic Emergency Purchase Programme (PEPP), which remains widely unutilized. The ECB can purchase up to EUR 1.85 trillion under this program. Still, it has deployed so far only a little bit over EUR 800 billion, and purchases decreased the last quarter.

Source: Bloomberg.

We believe that during next week's ECB Press Conference, Christine Lagarde will highlight the importance of continuous support of the economy and an expansion of the monthly purchases under the PEPP program. It should be enough to see European sovereigns reverting their losses, especially in Spain, where the Bonos-Bund spread have widened faster than its peers.

Source: Bloomberg.

Quarterly Outlook

01 /

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.