ECB holds off buying bonds

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Emergency government bond purchases by the European Central Bank remained close to zero last week, despite resurging nervousness about the countries worst hit by this year’s crisis over eurozone public finances.

The ECB said on Monday it had bought just €10m in bonds last week, scarcely higher than the €9m ($12m, £7m) purchased the previous week and an almost negligible sum compared with the billions spent immediately after the programme’s launch in May.

By bringing its purchases to a near standstill, the ECB has underlined its confidence that the eurozone financial system is returning to more normal conditions. But that view has been challenged in the past few days, amid fears that a possible “double dip” global downturn would damage countries such as Greece and Spain, which are under pressure to bring public finances under control.

“There are increasing worries about the global recovery and that is putting eurozone peripheral bonds under pressure,” said Domenico Crapanzano, head of euro rates sales and trading at Jefferies, the US investment bank. “The ECB may be winding down their bond purchases, but there is no way they can stop this altogether . . . We may see them having to intervene more heavily over the next few weeks.”

Highlighting the crucial support role still being played by the ECB, data from Portugal’s central bank showed the provision of ECB liquidity to the country’s banks rose more than a fifth between June and July.

Spanish and Greek banks also increased their reliance on the Frankfurt-based institution, according to calculations by Royal Bank of Scotland. Publication of bank stress-test results at the end of July could have relieved some of the pressure, however.

Some traders also reported ECB action last week in Irish bond markets. Monday’s data only covered settled transactions – so some deals may only show up in figures released next week – but they suggested any intervention had been tiny.

The ECB has made it clear its programme was meant just to ensure financial markets remained functional, but it has kept open the option of stepping up intervention.

Irish bond yields – yields have an inverse relationship with prices – have seen the biggest jumps recently among the so-called “peripheral” countries of the eurozone, reflecting worries over the health of its banks following a bigger capital injection for nationalised lender Anglo Irish than expected.

Ten-year Irish bond yields have risen half a percentage point to 5.32 per cent over the past week.

Other peripheral eurozone bond yields have also pressed higher, with Greek 10-year yields rising half a point over the past week to 10.72 per cent, the highest level since the end of June, while Portuguese 10-year bond yields have risen a quarter of a point over the past week to 5.18 per cent.

Conversely, German 10-year bond yields have fallen sharply to historic lows of 2.33 per cent.

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