High hopes ahead of ECB meeting push euro zone bond yields down

April 30, 2020: Euro zone government bond yields edged down on Thursday, reflecting some hope among bond investors that the European Central Bank will take further action later in the day to shelter an economy battered by the coronavirus.

Printing cash at a record pace to soak up ballooning state debt caused by the pandemic, the ECB is on its way to exhausting early the emergency bond purchases offered last month.

That has raised doubts about its commitment to help the eurozone through the worst economic crisis for decades and may encourage it to increase its support.

Having fallen after the ECB rolled out its Pandemic Emergency Purchase Programme (PEPP) last month, Italy's borrowing costs have risen again -- coming under upward pressure on Wednesday following an unexpected Fitch Ratings downgrade.

The ECB is expected to discuss expanding stimulus at its meeting on Thursday, although analysts say further action is more likely at its June meeting.

"We consider an increase of the PEPP envelope at today's meeting premature," said Christoph Rieger, head of rates and credit strategy at Commerzbank. "Visibility is still low and this would further undermine the incentives for the politicians to act."

Economic growth and inflation data for the euro area released on Thursday may support the case for further easing.

The U.S. Federal Reserve on Wednesday dashed hopes for a fast rebound from the coronavirus, promising to expand emergency programs as needed.

Germany's benchmark 10-year Bund yield fell more than 2 basis points to -0.51%, its lowest level in over a week. Italian 10-year bond yields were down 2.5 bps at 1.74% .

There was also focus on whether the ECB would discuss whether to buy non-investment grade debt or so-called "junk" bonds as part of its bond-buying stimulus scheme.

Bond strategists want to see if the central bank will provide more details of emergency bond purchases. The ECB releases almost no data on PEPP and has not decided what to do with bonds it buys when they mature.

Clarity on these issues could bolster market confidence and shore up sentiment towards Italian bonds, where the ECB is suspected to have stepped up buying to contain a rise in borrowing costs, analysts said.

"I would expect the ECB to widen the programme at some point, and that would allow it to buy more BTPs if needed and give EU authorities more space to act," said Mauro Vittorangeli, CIO for conviction fixed income at Allianz Global Investors.

Reuters