ECB Council to Hold Emergency Meeting to Address Market Selloff

(Bloomberg) -- The European Central Bank’s Governing Council will hold an unscheduled meeting to discuss the recent selloff in government bonds, which has grown in intensity after plans were announced to begin raising interest rates from record lows.

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The rate-setting panel will convene on Wednesday “to discuss current market conditions,” according to an ECB spokesperson. The meeting will begin at 11am Frankfurt time, a person familiar with the matter said. A statement may follow.

The announcement comes after the yield on Italy’s 10-year debt rose above 4% for the first time since 2014 this week. Investors are so far unconvinced the ECB can raise borrowing costs to combat unprecedented euro-zone inflation while also keeping yields among the bloc’s most vulnerable members in check.

A possible 75 basis-point rate increase from the Federal Reserve later in the day could add to the jitters.

Italian yields fell back as much as 29 basis points to 3.89% at Wednesday’s open, while the euro rose as much as 0.6% to 1.0475 against the dollar and money markets pared bets on a half-point rate hike next month to 50%.

“The central bank needs to be concerned if investors cannot buy or sell bonds in secondary markets and issuers have to postpone funding,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank. “In contrast to earlier episodes of disorderly market movements, however, inflation makes the difference this time around. The ECB cannot simply pour money at the problem as monetary tightening and higher rates are actually needed.”

While government bonds have been jumpy for some time, the ECB has so far only allocated reinvestments from its pandemic asset-purchase program toward stabilizing what it considers unwarranted market turbulence.

Investors, meanwhile, have been on the lookout for an additional instrument to tackle so-called fragmentation, and there was some disappointment when officials didn’t unveil one at their policy meeting last week.

‘No Limits’

While the Governing Council says it can quickly devise a new tool, it’s been reluctant to reveal details, convinced that there are few benefits in doing so and worried the markets may immediately try to test its limits.

Executive Board member Isabel Schnabel -- who’s in charge of the ECB’s market operations -- signaled Tuesday evening that any response to bond-market panic will come when it’s needed and will depend on the specific situation officials are faced with.

She did, however, pledge that the ECB won’t tolerate “changes in financing conditions that go beyond fundamental factors and that threaten monetary-policy transmission,” saying the commitment to stave off fragmentation “has no limits.”

Those remarks drew parallels to former ECB President Mario Draghi’s famous 2012 promise to do “whatever it takes” to save the euro. Schnabel highlighted the ECB’s Pandemic Emergency Purchase Program and the OMT created under Draghi as examples of policy makers’ ability to respond to different kinds of market stress.

The bond storm comes with the ECB poised to end eight years of negative rates with a “sustained” cycle of hikes planned from July and including a likely half-point move in September. It plans to end net purchases under a long-standing bond-buying program at the start of next month.

Several Governing Council members were due to speak on Wednesday. Bundesbank President Joachim Nagel’s remarks at 11:15 a.m. in Milan have been cancelled, as have Bank of Spain chief Pablo Hernandez de Cos’s at 2:30 p.m.

Wednesday’s ad hoc meeting was first reported by Italian newspaper Corriere della Sera.

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