London: Eurozone bond yields soared on Wednesday, as concerns the European Central Bank might reduce the scale of its asset purchases before the programme finally ends unnerved investors.

A Bloomberg article on Tuesday cited sources as saying the ECB would probably wind down the monthly €80 billion (Dh329 billion, $90 billion) scheme gradually.

The ECB has not discussed reducing the pace of monthly purchases, a central bank media officer later tweeted. The scheme is due to run until March next year and many analysts expect it to be extended given that inflation remains low.

But the mere possibility of a scaling back or “tapering” of the scheme was enough to rattle markets already questioning whether central banks can win the battle to boost growth and inflation, and whether governments should do more of the heavy lifting.

“I am surprised at the reaction, but it’s just this notion that the ECB may be discussing tapering one day that has upset the market,” said ING rates strategist Benjamin Schroeder. “If you kick off a QE programme you have to think from the start about how you will exit it.” Analysts at Bank of America Merrill Lynch said in a weekly note dated Sept. 30 that market speculation about ECB tapering had dominated conversations with clients.

Borrowing costs

On Wednesday Eurozone bond yields rose 6-12 basis points, led by southern Europe where the ECB bond buying has in particular helped anchor borrowing costs, especially at times of volatility.

Italy’s 10-year bond yield rose to 1.38 per cent, its highest level since late June, according to Reuters data.

Germany’s 10-year Bund yield — the Eurozone benchmark — rose more than 6 bps to minus 0.016 per cent.

The Bank of Italy said it was essential the ECB kept the programme in place to support the Eurozone economy, highlighting the nervousness surrounding any potential tapering.

Massive central bank stimulus has underpinned world markets since the financial crisis and any signs that QE might be withdrawn can cause instability.

Comments from former Federal Reserve chief Ben Bernanke in 2013 suggesting the Fed’s then QE programme could be unwound sparked a sell-off in bonds and emerging markets in what became known as the “taper tantrum.” Janus Capital tweeted its fund manager Bill Gross as saying on Tuesday: “ECB taper tantrum underway. Bearish for global bonds.” Gross, a former PIMCO fund manager and one of the best known names in the bond market, told Bloomberg Television he had now switched positions on European debt.

US and Japanese bonds yields were dragged higher by the spike in Eurozone yields, while the euro extended its bounce.

ECB asset purchases, launched in March 2015, have been a key driver of lower bond yields across the Eurozone — helping shift benchmark German bond yields into negative territory.

On edge

Comments from ECB officials in recent weeks suggesting the central bank was in no immediate hurry to address a scarcity of eligible bonds for QE or extend the programme have added to a sense that ECB policy is nearing the end of its effectiveness.

Inflation in the Eurozone is just 0.4 per cent, well below the ECB’s target of close to but below 2 per cent.

Following September’s policy meeting, ECB chief Mario Draghi said the central bank had not discussed extending asset purchases, sparking a sell-off in bond markets.

“Fundamentally there’s no reason to taper as they are not close to achieving their inflation mandate,” said Patrick O’Donnell, an investment manager at Aberdeen Asset Management.

“The reason you would taper is if you feel the policy is not working or the negative effects outweigh the positive effects of the policy.” Low bond yields and a narrow gap between long- and short-dated yields hurts banks’ profitability, and the Eurozone banking sector is struggling.

Germany meanwhile sold about 3.26 billion euros of 10-year bonds, with an average yield of minus 0.03 per cent.