European bond yields jumped on the back of comments in a speech by ECB president Mario Draghi to an ECB forum of central bankers and academics held in Sintra, Portugal. In a speech titled “Accompanying the Economic Recovery”, he made several comments which got economists thinking about the ECB’s planned exit from its negative interest rates and asset-purchase plans.
Amongst the comments were statements which suggest economic growth rates in the Eurozone are robust. According to Draghi, growth is “above trend and well distributed across the euro area”. Spare capacity is gradually being absorbed and “in time” pressures on wages and prices would rise. “And this is what we see,” he said.
He then implied the ECB would need to adjust monetary policy in a manner which would keep monetary conditions constant as European growth rates increased. In other words, rates would need to rise and/or asset purchases would be scaled back. As the neutral rate of overnight cash rose, a rate which is viewed as accommodative/loose/easy would also rise. “As the economy continues to recover, a constant policy stance will become more accommodative and the central bank can accompany the recovery by adjusting the parameters of its policy instruments; not in order to tighten the policy stance but to keep it broadly unchanged.”
However, the ECB chief is wary of financial market volatility which he said in the past has caused a tightening of financial conditions. In a move reminiscent of the U.S. Fed’s constant reminders regarding its planned policy normalisation, he said any change would be made gradually. “Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.”
German 10 year bond yields rose 15bps on the day to 0.40%, while French yields rose 16bps to 0.76%. U.K. and U.S. bond yields rose less than their European counterparts but they were still caught up; yields on both U.K and U.S. 10 year bonds rose 9bps to 1.09% and 2.23% respectively. When Australian markets opened the next day, the local 10 year bond yield rose 10.5bps to 2.52%.