isabel schnabel : the monetary policy non - puzzle in bond markets speech by ms isabel schnabel, member of the executive board of the european central bank, at the bond market contact group meeting, frankfurt am main, 15 september 2021. * * * accompanying slides of the speech. sovereign bond markets in the euro area and the united states have taken a remarkable turn over the summer. 1 despite the ongoing strong recovery from the crisis, the revival of inflation and surveys signalling firming expectations among market participants that central bank asset purchases globally may gradually slow in the near future, sovereign bond yields have declined and partly reversed the upward trend observed in the beginning of the year. in my remarks today i will discuss the drivers of recent bond market developments and zoom in on two factors that may currently pull yields lower : one relates to concerns regarding the spread of the delta variant, the other is monetary policy. while the first factor may be puzzling, the second is less so. real ( not nominal ) interest rates are the puzzle at the start of the year, sovereign yield curves across advanced economies steepened visibly. a decline in new coronavirus ( covid - 19 ) infections, a rising share of the population being vaccinated and prospects of large fiscal stimulus programmes on both sides of the atlantic boosted risk sentiment and supported a reflation trade that put upward pressure on long - term nominal bond yields ( left - hand chart, slide 2 ). starting in early june, however, long - term yields took a remarkable turn to the downside in the united states and in the euro area. by early august, euro area gdp - weighted 10 - year yields were again trading in negative territory, and 10 - year us treasury yields fell by 40 basis points over the same period. since then, low yields have frequently been tested by better - than - expected macroeconomic data, or by inflation prints that challenged the “ transitory ” hypothesis. yields occasionally spiked upwards and today remain above the lows we saw in august. but there still seems to be a deep gravitational pull that is keeping long - term yields from rising to anywhere close to the levels seen during the last recovery in 2017 - 18, or even to the levels seen earlier this year. in the euro area, exceptionally low interest rates extend across the entire currency union ( righthand chart, slide 2 ). sovereign spreads over german bunds remain below or close to post - 2008 lows, suggesting that common factors related to risk - free rates

itself, its precursor organisation – the european monetary institute – and the national central banks. indeed, the thorough preparation has paid off : the euro got off to a smooth start. given the sheer scale and significance of the project, it is, of course, unsurprising that it did not proceed entirely without hitches ; on the whole, however, there were no major complications. external developments such as the initial depreciation of the euro against the dollar have attracted somewhat pessimistic headlines ; but there are, in fact, several reasons for some satisfaction. the eurosystem, and specifically the governing council as its main decision - making body, has taken up its responsibilities of formulating and implementing the single monetary policy. in so doing, the governing council – which comprises the 11 national central bank governors of the euro area countries and the six members of the executive board of the ecb – has not only shown its determination to think and act for the euro area as a whole but has also proven its capacity for decisive action – as exemplified by the decision to cut the ecb ’ s main refinancing rate to 2. 5 % in april. with the launch of the single currency, the eurosystem successfully began to operate a system of centralised setting and decentralised implementation of monetary policy, using a new set of rules and procedures. in line with its treaty mandate, the eurosystem has also assumed its wider tasks and responsibilities, relating, inter alia, to the collection of statistics, the preparations for the issuance of banknotes or the operation of payment systems. the impact of the euro on financial markets the introduction of the euro has brought about momentous change in the financial markets, not only within the euro area, but also on a global scale. • first, a functioning money market for the euro area as a whole is a precondition for the successful operation of the eurosystem ’ s single monetary policy. in order to allow this euro area money market to operate smoothly, the eurosystem has established the requisite cross - border transfer and payment systems. the progress achieved in overcoming the previous fragmentation is highlighted by the rapid increase in transaction volumes within money markets and the almost immediate normalisation of bid - ask spreads. even at this early stage there is every justification for observing that the euro money market has already achieved considerable depth and a high degree of liquidity. • second, the advent of the new currency has also brought about a transformation