Peripheral regions within the eurozone could face increased stress or strain.
The European Central Bank (ECB) and the US Federal Reserve have been key players in supporting their respective economies throughout the pandemic, but their interventions are set to change in the coming months.
The ECB's Pandemic Emergency Purchase Programme (PEPP), which started at €750 billion, has grown to €1.85 trillion. However, according to recent statements, the ECB is unlikely to extend the PEPP beyond its expiration date in March 2022. This decision comes as inflation in Europe has exceeded the 2% target set by the ECB.
In a similar move, the Federal Reserve has been buying $120 billion worth of government bonds and mortgage-backed securities each month to support the US economy. The Fed began its tapering phase in November 2021, while the ECB announced its tapering plans to start in mid-2022. The Fed is expected to start reducing its bond purchases before the end of the year due to rising inflation in the US.
The tapering and eventual end of these massive bond-buying programmes could have significant implications for bond markets in both regions. The disappearance of two major price-insensitive bond buyers (Fed and ECB) is likely to drive up bond yields in the US and Europe.
In the Eurozone, bonds from peripheral countries, particularly Italy, may come under greater pressure due to reduced ECB purchases. The ECB may have to compensate for the expiration of PEPP by increasing purchases under the Asset Purchase Programme (APP). However, the gradual reduction of bond purchases by both the Fed and the ECB could also signal a shift towards economic recovery and a return to more normal monetary policy.
As the global economy continues to navigate the post-pandemic landscape, the decisions made by central banks like the ECB and the Federal Reserve will play a crucial role in shaping the financial landscape for years to come.
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