(Bloomberg) --
Investors dumped Europe’s bonds after Christine Lagarde did little to show them the region’s central bank can stop economies sliding into recession.
Italian bonds plunged, sending yields up by the most on record, after the European Central Bank held off on cutting interest rates and a boost to quantitative easing fell short of expectations. The bonds of Portugal and Spain followed, while French debt and the euro also slid.
The ECB is not here to close bond spreads, President Lagarde said in the press conference after the decision. Trading in BTP futures was halted after dropping rapidly.
“I didn’t realize the ECB’s primary mandate was to cause a bond market crisis,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “This is very reminiscent of 2011, when the ECB hiked rates and were the catalyst for the peripheral debt crisis.”
Europe’s peripheral bond markets -- and France -- were expected to be the biggest beneficiaries from any boost to the ECB’s bond-buying program given their large amount of outstanding debt. While the institution announced a “a temporary envelope” of 120 billion euros ($135 billion) until the end of the year, the purchases will be focused on the private sector.
“They know they can’t do much to support the economy and they signaled that they are not here to bail out the market,” said Antoine Bouvet, senior interest-rate strategist at ING Groep (AS:INGA) NV. “Literally everything sells off when central banks do that.”
The yield on Italy’s 10-year bonds jumped as much as 72 basis points. Haven German notes were one of the few to hold their ground, with yields on short-dated debt declining. The ECB decision paled in comparison to the action taken by the Bank of England and the U.S. Federal Reserve.
“After the bold action from the Fed and Bank of England, expectations were running high that the ECB would follow suit and deliver a rate cut,” said Chris Attfield, a fixed-income strategist at HSBC Holdings Plc (LON:HSBA). “This was a disappointment to a market that had already discounted more than the ECB delivered, and creditized bond markets like Italy are the place this is felt most keenly.”
No Cut
German bond yields have touched record lows across the curve this week, suggesting that investors are bracing for an economic contraction and perpetually-low inflation. The euro fluctuated before traded down 1% at $1.1151.
There were signs that Germany may be willing to abandon its long-held commitment to a balanced budget. Minutes before the ECB decision, bunds pared their rally on a report that Chancellor Angela Merkel’s administration would be willing to accept deficit spending.
“The ‘whatever it takes’ moment didn’t come,” said Tanvir Sandhu, global chief global derivatives strategist with Bloomberg Intelligence. “A temporary, big upsizing in QE would have helped Italy.”
(Updates throughout)