Long-term rates have been rising sharply across advanced economies, triggering concern among bondholders and pushing yields higher in a vicious circle. In Europe, the shadows of the 2011-12 crisis are emerging again, with widening spreads between core and peripheral government bonds—France now treated by markets as part of the periphery.
The European Central Bank is better equipped than ever to address financial market tensions, with bond-buying tools and programmes to tackle yield spikes. However, observers question why the ECB continues quantitative tightening (QT)—shrinking its balance sheet by not replacing maturing government bonds—during this stress. This policy forces private investors to absorb a larger share of net bond supply when long-term rates are already under upward pressure.
Launched in March 2023 to normalize the central bank's balance sheet, QT has been modified or interrupted by other central banks in response to market conditions. In the euro area, normalization is framed as an obligation driven more by nostalgia than rigorous analysis. Economic and market conditions have fundamentally changed since the financial crisis, including stricter banking regulations requiring larger holdings of high-quality liquid assets like government bonds.
Market-making has also evolved, with non-banks like hedge funds playing a greater role, increasing vulnerability during liquidity stress. The ECB maintains its QT pace is relatively slow and that it retains flexibility to adjust if needed.
Source: Financial Times Markets · Summarized by HeadlinesBriefing