September 26, 2019 / 1:41 PM / 19 days ago

Bond markets assess fallout as policy hawk Lautenschlaeger quits ECB

LONDON (Reuters) - Euro zone bond yields held above two-week lows on Thursday, as investors focused on how European Central Bank policy will look after the resignation of Sabine Lautenschlaeger from the ECB board.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, September 25, 2019. REUTERS/Staff

Euro zone yields failed to track those of U.S. Treasuries, which fell 5 basis points to below 1.7% after the release of a whistleblower complaint accusing President Donald Trump of pressing Ukraine to investigate a political rival in next year’s U.S. election.

The question for euro zone markets is who will replace Lautenschlaeger, as incoming president Christine Lagarde takes office, and whether this would impact the bank’s stimulus measures: quantitative easing in particular.

The ECB did not give a reason for the resignation of Lautenschlaeger, Germany’s appointee to the board and a policy hawk. She was among the third of ECB policymakers who opposed resuming asset purchases at the bank’s Sept. 12 meeting and her resignation held the market spotlight in an otherwise quiet session.

“It looks like Draghi is currently on the defensive and needs to explain what he’s up to, and why he was the frontrunner of an ECB taking an even more expansionary stance,” said DZ Bank rates strategist Daniel Lenz.

He was referring to a perception in markets that Draghi was the driving force behind recent easing measures. They have prompted a high degree of dissent from a body that normally strives for consensus.

In an email to ECB staff, Lautenschlaeger said she thought this was the best course of action given her situation.

Pictet Wealth Management strategist Frederik Ducrozet said Germany would be under pressure to choose another woman as a replacement.

Possible candidates, according to him are Bundesbank Vice President Claudia Buch, Isabel Schnabel, a member of the German Council of Economic Experts, and BlackRock Investment Institute head of economics and market research Elga Bartsch.

Analysts said Schnabel could be considered dovish, while Buch could lean hawkish, given her role in the Bundesbank.

Meanwhile, Bank of Italy deputy governor Fabio Panetta is the only candidate proposed to replace outgoing board member Benoit Coeure, who also disapproved of the recent ECB decision.

This could shift the board’s balance to the dovish side, Commerzbank strategist Rainer Guntermann, said.

Ten-year yields were flat across the region DE10YT=RR FR10YT=RR NL10YT=RR, with Germany’s steady at -0.58%, above Wednesday’s almost two-week lows.

Spanish yields rose 2 bps, retreating after a scintillating rally which saw a slide of some 15 bps since mid-September ES10YT=RR.

Investors are also waiting to see if fiscally conservative northern European governments finally start spending more to complement ECB easing measures.

France which has already said it will offer 10 billion euros in new tax cuts in its 2020 budget is to unveil its budget in parliament on Friday

There are also some encouraging signals from Germany, which is to issue green bonds from 2020 to finance green investments, a draft climate plan showed.

And Chancellor Angela Merkel said euro zone governments needed to use appropriate fiscal policies to ensure the ECB is not “overburdened”

Reporting by Yoruk Bahceli; Editing by Kirsten Donovan

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