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Bank of France governor François Villeroy de Galhau. Photo: ERIC PIERMONT/AFP via Getty Images

Rising bond yields may not be generating much worry from market participants, but central banks have taken notice and are asserting that action must be taken.

Driving the news: European Central Bank governing council member and Bank of France governor François Villeroy de Galhau said the ECB should start by using its pandemic emergency bond-buying program to drive down yields.

  • He noted that the ECB continues to "stand ready to adjust all of our instruments, as appropriate, including possibly a lowering of the deposit rate if needed.”

Why it matters: Those were the strongest comments yet from an ECB official and they put the Federal Reserve on an island among major central banks in their response to rising yields.

  • As I wrote yesterday, an increasing number of central bankers, including Bank of Japan governor Haruhiko Kuroda, have recently either taken action to increase their bond-buying programs or announced their intention to do so if yields continue to rise.
  • The Fed has said it plans to maintain its current program and downplayed the threat of inflation.
  • More bond buying by central banks means more liquidity in global asset markets, but also could signal desperation on the part of central bankers to keep yields artificially low.

Be smart: ”Villeroy’s statement voices the sentiment of most analysts after last week’s events: with the euro-zone growth outlook being weighed down by slow vaccine distribution, the ECB must avoid undue policy tightening,” Simon Harvey, senior analyst at Monex Europe, told Bloomberg.

  • “However, talk is cheap and the market will need proof of action by the ECB.”

Yes, but: "Upward pressure on real yields in these countries may persist unless the Fed, which has been more reluctant to act so far, makes clear that it is not happy with the recent rise in US real yields," Franziska Palmas, a markets economist at Capital Economics, said in a note.

  • "Given that safe government bonds are effectively substitutes for investors, change in US yields tends to pull others in the same direction. In other words, if the Fed continues with its current approach, it will make life more difficult for other DM central banks."

Go deeper

Dion Rabouin, author of Markets
Mar 1, 2021 - Economy & Business

Clash of the central bankers

Photo Illustration: Eniola Odetunde/Axios. Photos: Bloomberg, Samuel Corum (Stringer)/Getty Images

While Fed chair Jerome Powell is brushing off the seismic rise in government bond yields and a corresponding decline in stock prices, a group of central bankers in the Pacific are starting to take action.

Driving the news: Bank of Japan governor Haruhiko Kuroda told parliament on Friday the BOJ would not allow yields on government debt to continue rising further above the BOJ's 0% target.

Updated 36 mins ago - Science

Nor'easter slams East Coast with flooding rain and powerful winds

A residential area in Middlesex County as floodwater from the nor'easter covers streets in New Jersey on Tuesday. Photo: Tayfun Coskun/Anadolu Agency via Getty Images

A monster storm was slamming the Northeast with record rainfall and powerful winds over Tuesday night — causing flash flooding that resulted in people having to be rescued in New Jersey and New York roads to close.

Threat level: All of southern New England westward to New York City and northern New Jersey was under the threat of flash flooding and coastal flooding from the nor'easter through Tuesday night into early Wednesday, per the National Weather Service.

41 mins ago - World

Blinken speaks with Sudan prime minister after his release

Sudan's Prime Minister Abdallah Hamdok. Photo: Ebrahim Hamid/AFP via Getty Images

Secretary of State Tony Blinken spoke on the phone on Tuesday evening with Sudan’s Prime Minister Abdalla Hamdok after the military released him from custody.

Why it matters: Hamdok’s release was a result of pressure on Sudan’s military leader General Abdul Fattah al-Burhan from the U.S. and other countries but also from the different political parties in Sudan and massive protests in the streets.