The European Central Bank’s rate-setting Governing Council will hold an unscheduled meeting on Wednesday morning to discuss the recent sell-off in government bond markets, a spokesperson said.

Bond yields have risen sharply since the ECB promised a series of rate hikes last Thursday and the spread between the yields of Germany and more indebted southern nations, particularly Italy, soared to its highest in over two years.

"The Governing Council will have an ad-hoc meeting on Wednesday to discuss current market conditions," an ECB spokesperson said.

The meeting was scheduled for this morning but it was not yet clear whether a statement would be published, several sources with direct knowledge said.

Invitations to the meeting were sent out on Tuesday and some policymakers, who were expected to attend a conference in Milan on Wednesday, called off their appearances.

Investors took some comfort that the ECB was discussing the market sell-off. The meeting comes on the same day that the U.S. Federal Reserve is expected to hike interest rates, possibly by as much as 75 basis points.

The euro surged over half a percent to 1.0487 against the dollar, ten-year Italian yields fell 22 basis points and Italian stock futures rose sharply.

Earlier, ten-year German yields, a benchmark for the 19-country currency union, had hit 1.77 per cent, their highest level since early 2014 while their Italian counterparts jumped 240 basis points higher, the largest spread since early 2020.

ECB board member Isabel Schnabel, the head of the bank's market operations, on Tuesday said that the ECB was "closely" monitoring the situation and was ready to deploy both existing and new tools if it found that the market repricing was "disorderly."

"We will not tolerate changes in financing conditions that go beyond fundamental factors and that threaten monetary policy transmission," Schnabel said, adding that there were no limits to its commitment to prevent fragmentation.

She argued that as a first line of defence, the ECB could deploy cash from maturing bonds into stressed markets and if needed, the bank could devise a new instrument.

But Ms Schnabel argued against pre-emptively announcing a tool as it would need to be tailored to a particular situation with conditions, limits and safeguards set on a case-by-case basis.

"Now we're talking. Just talking, but it's a start," Pictet Wealth Management economist Frederik Ducrozet said.

“We should get a statement along the lines reflecting a willingness to act and then maybe they will also task committees to work on options, this is what was missing from last week,” Ducrozet added. - Reuters

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