LISBON: Yields on Italian and Portuguese debt, the focal point of recent concerns about the health of Europe’s financial sector, fell on Monday after one of the ECB’s top policymakers said it would protect banks from unintended harm of further policy easing.
The moves formed part of a broad rally in riskier assets such as stocks after crude prices clawed back some Friday’s sharp declines. Euro zone bank shares, which have shed a fifth of their value so far this year, led the surge higher. “We have had a rare acknowledgement from the ECB that the cost on banks needs to be mitigated,” Societe Generale strategist Ciaran O’Hagan said.
ECB Vice President Vitor Constancio said on Friday that more accommodation could be delivered in a way that mitigates “the immediate, direct impact on the cost on banks”. This was read by some analysts as an endorsement of tiered rate policy similar to that recently adopted by Japan.
The ECB is expected to unveil more cuts to its already deeply negative bank deposit rate, effectively a tax on banks designed to encourage them to lend, at its next meeting on March 10. But many argue the impact of negative rates on bank earnings means they are now part of the problem rather than the solution. [
Meanwhile, oil prices hauled back some of the almost 4 percent fall seen Friday as a falling rig count in the United States is expected to lead to a decline in 2016 production. Yet general oversupply worries are expected to keep the market on unsteady ground, dimming the outlook for inflation and forcing the ECB to ramp up its stimulus efforts.
Yields fell in peripheral Europe, where the bulk of banking concerns have focused. Portuguese and Italian 10-year yields were 5 basis points lower at 3.33 percent and 1.53 percent, respectively.
The fall in Spanish yields was not as pronounced as elsewhere in southern Europe after Moody’s changed the outlook on Madrid’s Baa2 rating to stable from positive, citing concerns about the pace of economic reforms after inconclusive elections.
Top-rated German bonds, the bloc’s benchmark, were flat at 0.21 percent. Greek yields were slightly lower after a local press report on Saturday that Athens’ EU lenders are working on a plan that would initially allow lower interest rates and longer maturities on its 316-billion-euro ($352 billion) debt, while at a later stage there would be talks on linking debt payments to economic growth.