The European Central Bank intends to increase its purchases of euro-area assets in May and June ahead of an expected low-liquidity period in the summer, Executive Board member Benoit Coeure said.
“We are also aware of seasonal patterns in fixed-income market activity with the traditional holiday period from mid-July to August characterized by notably lower market liquidity,” Coeure said, according to the text of a speech delivered in London on Monday. “If need be, the frontloading may be complemented by some backloading in September when market liquidity is expected to improve again. The slightly higher purchase volume that market analysts may observe in the coming weeks is therefore unrelated to the recent episode of market volatility.”
The comments come after a bond-market sell-off that pushed the German yield curve to the steepest in five months and wiped more than $400 billion off the value of global fixed-income markets. In the first two months of large-scale asset purchases, the ECB met its monthly purchase target of 60 billion euros ($67 billion), even though central banks of some smaller euro-area countries have already struggled to find enough bonds to buy and concerns about scarcity emerged.
“That’s exactly what the market needs to calm down,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd in Zurich. “It will take fear out of the market that high negative net issuance in the summer leads to less market volume in the summer.”
In his speech, Coeure also said that while the recent reversal in euro-area bond yields is “no cause for concern,” its rapidity is worrying.
“It reflects a market correction, recreates two-way risk in the market and reflects the fact that, as our program takes effect, some of the more pessimistic assumptions of future growth and inflation trends are being revised,” he said. “After several similar episodes, it is yet another incident of extreme volatility in global capital markets showing signs of reduced liquidity.”
The euro extended its decline versus the dollar after the publication of the remarks and euro-area government bonds advanced. The single currency weakened 1 percent to $1.1204 at 8:27 a.m. London time. Germany’s 10-year bund yield fell 7 basis points, or 0.07 percentage point, to 0.58 percent.
The ECB’s bond-purchase program is due to run until September next year and has an intended volume of 1.1 trillion euros.