Former ECB Executive Board Member: QT Should Be Paused Amid Bond Market Turmoil
nashnova research
Former ECB executive board member Benoît Cœuré argues the ECB should pause quantitative tightening (QT), warning that shrinking the balance sheet while long-term rates surge and eurozone spreads widen is feeding a vicious cycle in bond markets.
What is going wrong in bond markets?
Long-term interest rates across most advanced economies have risen sharply in recent months, and the spread between core and periphery eurozone government bonds has widened significantly.
France is now priced as a periphery country. This means → markets are demanding a risk premium on French debt reminiscent of the 2011–2012 euro-area crisis.
In plain terms = French government bonds used to sit in the "safe" bucket; investors now treat them more like Greek or Italian debt, requiring higher yields to hold on.
Why is QT pouring fuel on the fire?
The ECB launched QT in March 2023, letting maturing bonds roll off without reinvestment to shrink its balance sheet.
This means → the share of government bond supply that private investors must absorb has jumped, because the central-bank buyer has stepped back.
Long-term rates were already under pressure; QT pushes yields higher, higher yields make bonds harder to sell — a vicious cycle takes hold.
Does a "normal" balance-sheet size actually exist?
Cœuré criticises the ECB for treating balance-sheet reduction as an "obligation," calling it nostalgia for the pre-crisis order rather than a conclusion grounded in rigorous analysis.
He cites two structural shifts since the financial crisis: first, regulation now requires banks to hold more government bonds as high-quality liquid assets; second, bond market-making has migrated from banks to hedge funds and other non-bank players — making markets more fragile when liquidity tightens.
In plain terms = the market's plumbing has been completely rebuilt since the crisis; shrinking the balance sheet using the old blueprint risks bursting the new pipes.
What have other central banks done?
The Federal Reserve and the Bank of England have already paused or recalibrated their QT programmes in response to market conditions.
The ECB, by contrast, has pressed on — and kept its timeline and calibration details deliberately vague.
This means → the ambiguity itself becomes a risk premium — markets, unable to predict when the ECB will stop, price in defensive margins that push long-term rates even higher.
What is Cœuré's prescription?
The core recommendation: pause QT until markets stabilise, then reassess; monetary policy should lean on its traditional tool — the short-term policy rate — to manage inflation.
He notes that new Fed Chair Kevin Warsh has already set up a task force, commissioning three prominent economists to evaluate QT's market impact — the ECB needs to do the same homework.
This reflects a deeper judgment: balance-sheet adjustment should be a secondary instrument, not the lead actor while bond markets are already in turmoil.
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