Mar 8, 2021 - Economy

The European Central Bank and the market's moment of truth

ECB president Christine Lagarde.

ECB president Christine Lagarde; Photo: Chip Somodevilla/Getty Images

The biggest event for markets this week will be Thursday's meeting of the European Central Bank's governing council and the press conference following it from ECB president Christine Lagarde.

Why it matters: With interest rates jumping around the globe, investors are looking to central bank heads to see if they will follow the lead of Fed chair Jerome Powell, who says rising rates are nothing to worry about, or Bank of Japan governor Haruhiko Kuroda, who has drawn a line in the sand on rates.

The big picture: Government bond yields are rising because central bankers say they want inflation, but rising inflation expectations come with higher borrowing costs in a world that already is indebted to the tune of 356% of global GDP with no real plan to reduce its debt load.

The latest: The continuation of the selloff in equities seen on Friday could push policymakers toward a new sense of urgency.

  • European stocks, like their U.S. counterparts, have sunk in recent weeks as interest rates have risen at spectacular speed, drawing the attention of central bankers as diverse as Kuroda, the Fed's Lael Brainard, Reserve Bank of Australia's Philip Lowe and Bank of Korea's Lee Ju-yeol in the last two weeks.

What they're saying: Lagarde said in late February that the ECB was “closely monitoring” interest rates, but has not firmly committed to taking action that could include increasing the central bank's bond-buying programs or even lowering its -0.5% interest rate, as other members of the governing council have suggested.

  • The majority of economists in a Bloomberg survey expect the ECB to increase emergency asset purchases to counter rising bond yields.
  • Stepping up bond purchases or adding to its pandemic emergency purchase program would mark a turn from verbal intervention to market intervention.

Where it stands: The world's leading industrialized central banks — the Fed, BOJ and ECB, which collectively hold around $23 trillion on their balance sheets — are facing a moment of truth.

  • With the Fed meeting next week, March 16-17, and markets expecting Powell and company to make no changes to their current policy, the actions of the ECB could set the tone for a new phase of action to tame rapidly rising rates.
Data:; Chart: Axios Visuals

The concern from ECB leaders over rising bond yields is especially notable given how much more U.S. government yields have moved higher than their European counterparts this year.

By the numbers: German 10-year government bond yields, the European benchmark, have risen from -0.61% to start the year to -0.30% as of Friday.

  • U.S. 10-year Treasury yields have gone from 0.92% to start the year to 1.58% on Friday.

What it means: The increase in U.S. Treasury yields has been more than double that of comparable German bunds and pushed the spread between the two to its most negative in more than a year.

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