The European Central Bank (ECB) increased the pace of bond purchases in the most recent meeting, as an action against the rising bond yields in the previous March 11 meeting, while the general structure of Pandemic Emergency Purchase Program (PEPP) have not changed. After this action, policy makers are not expected to take any additional action until the end of June. On the other hand, the minutes of the last meeting show that the Bank is not in full agreement on this action. Some policy makers have also raised concerns about the slow rollout of the vaccine and the reliance on government support programs.
We mentioned that the bond movement in the USA may have an economic basis, but that there is no such economic recovery at that rate in the Euro Zone. It is a fact that the USA is far ahead in terms of social restrictions and vaccination, which leads to the gap in recovery. US bond yields are trying to stabilize around 1.60% in the 10-year maturity, and the factor that makes them not permanent above 1.70% in the last period is that there is no extra situation in terms of reflation pricing. In other words, the inflationary pressure will not create a permanent disorder. However, as QE tapering will be based on economic recovery, not inflation, upward pricing is still possible.
In the ECB article, we talked about the Fed a little too much, in fact, this is due to the lack of action we expect from the ECB. There will be “blackout” this week before next week’s FOMC meeting. There won’t be an action meeting, of course, but the Fed will prepare the ground for communication as the economy improves. On the ECB side, the purchase speed will be reduced as there is no need for spread control. This was already a very fine tuning and would not create a permanent situation unless the overall structure and size of the program changed. Therefore; Lagarde is not expected to make a commitment in this regard. In a Financial Times news published today; it reveals that the hawkish members are putting pressure on reducing their asset purchases. An interesting situation happens when we expect tapering from the Fed and lags behind in the economic recovery. For those who have access; https://www.ft.com/content/c587dd18-29d4-4ad4-9362-6b7ab94ba2dd
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