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ECB fails to raise emergency bond buys, blames redemptions

FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt

FRANKFURT (Reuters) – The European Central Bank blamed large bond redemptions for failing to increase the pace of its emergency purchases last week, missing market expectations and adding to doubts about its commitment to supporting a pandemic-stricken, debt-laden economy.

Investors had been waiting for the weekly update to establish whether a divided ECB was prepared to step in and stem a selloff in government bond markets, largely spurred by talk of higher inflation in the United States.

The ECB bought 11.9 billion euros worth of bonds under its Pandemic Emergency Purchase Programme (PEPP) in the five days to March 5, slightly less than in the previous week, the data showed.

An ECB spokeswoman said the net purchases were affected by “seasonality factors”, particularly large amounts of bonds reaching maturity. This “temporarily delayed” an increase in the ECB’s bond pile, she said.

The ECB will publish redemption figures on Tuesday.

“A second consecutive week of very low net PEPP purchases … despite dovish ECB rhetoric,” said Frederik Ducrozet, an analyst at Pictet, on Twitter “And don’t get us started with large redemptions and seasonal factors. Where there’s a will there’s a way.”

He had expected purchases of 20 billion euros while UniCredit analysts had set the bar at 17 billion euros. The ECB has 971 billion euros worth of PEPP firepower left to spend by March 2022.

The small net purchases in PEPP, however, were offset by more buying under other ECB programmes, which took the weekly total to 17 billion euros, up by 24% on the week before.

DIVIDED ECB

ECB policymakers are divided on the merits of intervening to bring down bond yields before their policy meeting on Thursday.

The dovish camp, headed by Italian board member Fabio Panetta, has argued that the rise in yields is unwarranted and jeopardising the euro zone’s recovery.

However, his German colleagues Isabel Schnabel and Bundesbank President Jens Weidmann have been more cautious, with the former going as far as saying that a rise in yields could be welcome if it reflected improved growth prospects.

Despite the rise, bond yields are still low in absolute terms or even negative.

Italy was paying 0.74% to borrow for 10 years on the market, or less than the expected rate of inflation. Germany, the bloc’s safe haven, was still getting paid 0.29% via below-zero yields.

ECB weekly data includes trades completed by the market close on Wednesday, which then take two days to settle.

Around 24 billion euros in Italian multi-year bonds and a further 8 billion euros in French inflation-protected notes matured during the reporting period, according to UniCredit estimates.

(Reporting By Francesco Canepa)

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