LIVE MARKETS-Should the ECB worry about monetary policy transmission?

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

SHOULD THE ECB WORRY ABOUT POLICY TRANSMISSION?

Long-dated sovereign bond yields rose sharply since early December along with money market rates, in a move which could be seen as quite unusual as markets priced 100 basis points of ECB rate cuts in the next few months.

"EMU-11 GDP-weighted sovereign 10-year real yields are near the two-year highs," Citi strategists say, adding that the rise in sovereign real yields only received a passing mention in the ECB December Accounts.

Front-end real overnight index swap (OIS) rates are still significantly lower than when the easing cycle began, but 10-year real OIS has almost reversed all of the progress made.

"What we find curious is that this is a stark contrast to the importance placed specifically on sovereign yields for wider funding conditions and policy transmission during the Pandemic Emergency Purchase Programme," they say, recalling a speech of ECB chief economist Philip Lane in 2021 about "favourable financing conditions as the compass guiding monetary policy."

"It will be interesting to see if the recent backup in (long-term) sovereign yields raises any unease about transmission impairment at next week’s ECB meeting or if the fall in the front-end is of sufficient comfort."

(Stefano Rebaudo)

*****

EARLIER ON LIVE MARKETS:

IS POPULISM A CONCERN? "GO LONG FINANCIALS" CLICK HERE

TECH DRAG, MIXED EARNINGS, BANKS UP CLICK HERE

BEFORE THE BELL: FUTURES DIPS, PREPARING FOR EARNINGS SEASON CLICK HERE

CHINA'S SHOT IN THE ARM FOR MARKETS CLICK HERE