German government bond yields hit highest in a year... ECB likely to increase Eurozone bond purchases

French government bond yields turn positive for the first time since June last year

[Asia Economy Reporter Park Byung-hee] The European Central Bank (ECB) is expected to expand the scale of eurozone government bond purchases through the Pandemic Emergency Purchase Programme (PEPP). This is due to signs of contraction in the private sector lending market as eurozone government bond yields have recently risen.

According to the Financial Times on the 25th (local time), Philip Lane, the ECB's Chief Economist, said, "We are closely monitoring the trend of long-term bond yields," adding, "We will operate the asset purchase scheme appropriately to maintain a favorable financial market environment."

The ECB introduced the PEPP last year as the COVID-19 pandemic spread, increasing financial market uncertainty. The PEPP was introduced with the aim of stabilizing financial markets by purchasing eurozone government bonds worth 1.85 trillion euros until March 2022. It is currently known that nearly 1 trillion euros of purchase capacity remains under the PEPP.

Last week, the ECB net purchased government bonds worth 17.3 billion euros through the PEPP. The purchase volume slightly decreased compared to the previous week, marking the lowest level in nearly six months.

With COVID-19 vaccinations gaining momentum this year and growing expectations for global economic stabilization, concerns about inflation are also increasing. As a result, government bond yields in the United States and major European countries are all on the rise.

On the 25th, the U.S. 10-year Treasury yield surged to around 1.6% during the day, and the German 10-year government bond yield rose to its highest level since March last year. The French 10-year government bond yield turned positive for the first time since June last year.

Germany 10-Year Government Bond Yield 1-Year Trend

France 10-Year Government Bond Yield 1-Year Trend

As yields rise, the lending market has recently shown signs of contraction.

Last month, the volume of private loans by eurozone banks fell below 12 billion euros, a 75% decrease compared to the average monthly loan volume last year.

Frederic Ducrozet, investment strategist at Pictet Wealth Management, said, "After the ECB confirms whether the bond market sell-off continues, it is expected to increase the weekly PEPP purchase volume to over 20 billion euros."