Europe Economy

Are Markets Bracing for Major ECB Bond Buying?

Stocks and bonds moved higher in Europe on Monday after a report in respected German magazine Der Spiegel that the (explain this) is considering setting a target for bond yield spreads in southern Europe. The gains were reversed after an ECB spokesman called the report "misleading."

Mario Draghi, president of the European Central Bank (ECB)
Hannelore Foerster | Bloomberg | Getty Images

Some analysts suggested that the market is ultimately preparing for more decisive action from the ECB — once Europe’s politicians and bankers have returned to their desks from the summer break (Read More: Euro Crisis Revving Up Again—Fasten Your Seatbelts.)

Spain’s Finance Minister used a newspaper interview to highlight thatSpain — widely believed to be the next candidate for a bailout by the ECB, International Monetary Fund (explain this), and European Commission — would like to see the ECB commit to unlimited intervention in secondary sovereign debt(explain this) markets.

“Such reports suggest that we are moving towards triggering a forceful purchase program by the combined forces of ECB and EU funds next month,” Julian Callow, chief European economist at Barclays, wrote in a research note Monday. “The formal decision on this might well not be taken by the Eurogroup until its Sept. 14 meeting (which comes just after a G20 finance minister and central bank governor meeting — though it seems likely that private discussions will be taking place at the Eurogroup level and with the ECB ahead of the ECB's meeting on Sept. 6).”

"It is absolutely misleading to report on decisions, which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s Governing Council, which will act strictly within its mandate," an ECB spokesman told CNBC. "As far as recent statements by government officials are concerned, it is also wrong to speculate on the shape of future ECB interventions. Monetary policy is independent and undertaken strictly within the ECB mandate."

Yields on Spanish and Italian debt fell Monday as bond traders responded to the Spiegel report, and then started climbing again once it was denied. If the ECB started buying peripheral countries’ bonds, it could keep them from seeking a full bailout, like Ireland or Greece, with all the conditions attached. However, the central bank would then increase its own exposure to peripheral debt.

But market expectations for such a program may be dashed. The German finance ministry was quick to deny Der Spiegel’s report Monday morning.

FX Markets Trading on Hopes of ECB Action
FX Markets Trading on Hopes of ECB Action

"I am not aware of any such plans and haven't heard anything," a spokesman for the ministry told reporters. "In purely theoretical, abstract terms, such an instrument would certainly be very problematic. But I know of no proposal along these lines," he said.

And the game in Spain still seems to be unresolved, with both Spain and the ECB squaring off over the conditions attached to the country’s partial bailout.

“The market still craves a balance of affirmative action such as purchasing bonds to control the price of debt for peripheral euro zone states combined with longer term structural changes to avoid a recurrence of the debt crisis in years to come,” Lee McDarby, head of dealing at Investec Corporate Treasury, wrote in a research note.

—By CNBC’s Catherine Boyle; Follow Her on Twitter @catboyle01