Investors expect the European Central Bank to accelerate the shrinking of its balance sheet this summer, testing their appetite for eurozone sovereign debt as cash-strapped governments also turn to markets to raise funds.
The shift by the ECB to tighten its policy stance is likely to drive up government borrowing costs in more heavily indebted southern European countries once “investor fatigue” from more bonds flooding the market sets in, some analysts warned.
This month the ECB started to reduce its bond holdings by not replacing €15bn of the securities that mature each month in its asset purchase programme, which makes up two-thirds of the almost €5tn of assets it has purchased under its longstanding policy of quantitative easing. Debt markets were unperturbed by the Frankfurt-based institution starting to reduce its bond holdings this month.