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Euro zone bond yields slip, stocks and euro rise as ECB slows support

© Reuters.

By Yoruk Bahceli

(Reuters) – Euro zone bond yields slipped while stocks cut losses and the euro rose after the European Central Bank said on Thursday it would moderately slow its PEPP pandemic emergency bond buying during the fourth quarter.

The bloc’s bond markets, on alert after yields rose on a series of hawkish comments from policymakers last week, rallied after the decision.

But as the decision was in line with expectations of a slight slowdown from the current 80 billion euros per month of bond purchases, moves were contained.

By 1204 GMT, Germany’s 10-year yield, the benchmark for the bloc, fell as much as 1.5 bps on the day and was last down less than a basis point at -0.33%, around where it was prior to the ECB decision.

Peripheral bond yields, which have risen in the past week, fell.

Italy’s 10-year bond yield fell 4 bps on the day and was last down 3 bps at 0.72%, having trading at 0.74% just before the ECB policy announcement.

That narrowed the closely watched gap with German 10-year yields to the tightest in about two weeks at just under 104 bps.

The euro rose as much as 0.3% to the day’s high of $1.1840 immediately after the announcement and was last up 0.2% at $1.18395.

European stocks ticked higher, reducing their losses to 0.2% on the day, having been down around 0.4% prior to the decision.

“I think it has been largely priced by the market,” said AXA Group chief economist Gilles Moec.

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Many analysts also see the PEPP purchase slowdown as a largely technical adjustment. Given the remaining PEPP envelope, the ECB would not be able to buy more than 73 billion euros a month on average anyway, according to UniCredit.

The ECB will also present new growth and inflation projections, which are likely to be upward revisions.

Another focus for analysts is whether the bank gives any hints on what it will do with its conventional bond buying after PEPP expires in March 2022, though that’s another topic that Lagarde is not expected to go into.

Analysts expect the ECB will need to increase its conventional APP asset purchases, currently at 20 billion euros a month, will need to be increased once PEPP ends.

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