ECB mulls setting target bands for bond yields: sources

Fri Aug 24, 2012 11:39am EDT
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FRANKFURT (Reuters) - The European Central Bank is considering setting yield band targets under a new bond-buying program to allow it to keep its strategy shielded and avoid speculators trying to cash in, central bank sources told Reuters on Friday.

Setting a band is an option gaining in favour among central bankers, but the decision would not be made before the ECB's September 6 policy meeting, the sources said.

"That is one of the options that is currently being discussed in the working groups and will then be handled by the Governing Council," a euro zone central bank official told Reuters on the condition of anonymity.

"That is the most likely approach, and also the one that could be most successful."

It is not clear how wide that band would be or how the ECB would then decide when to intervene in the bond markets to bring down the borrowing costs.

A further point under discussion is whether such a band would be tied to bond yields - their absolute interest rate levels - or bond spreads, the difference between a country's debt compared to the benchmark German bonds.

ECB President Mario Draghi signalled earlier this month that the bank may start buying government debt to reduce crippling Spanish and Italian borrowing costs, comments that fuelled a broad-based upturn in sentiment on global markets.

The ECB said it would buy bonds in the secondary market and in shorter maturities, while European bailout funds would buy bonds at issue at longer maturities.

German weekly magazine Spiegel said on Sunday the ECB would decide at its September meeting whether to implement interest rate thresholds on such purchases, either on their yields or on the premiums of those yields over German Bunds.   Continued...