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Reflationary risks could trigger a violent reaction in bond prices, says ECB's Constancio

European Central Bank vice-president Vitor Constancio told CNBC on Wednesday that a possible revival of reflationary pressures in the U.S. could spillover throughout Europe and spark a volatile reaction in bond prices.

Constancio pointed to the sudden surge in bond yields after November's U.S. election as evidence of the potential turbulence that could envelop some euro zone sovereigns. "That is the risk… it is the materialization of this reflation narrative," he said Wednesday.

The reflation trade refers to stocks that could stand to benefit from higher inflation and yields. Investors and traders had been betting on rising inflation under Donald Trump's presidency after he pledged to enact an agenda that included lower corporate taxes and infrastructure spending.

While Constancio admitted a "Trump rally" currently appeared less likely than in January, he was careful not to undermine the significance of an economic recovery, particularly in Europe.

"What is still ongoing is an economic recovery which is not so buoyant as markets thought some time ago but it is, nevertheless, a recovery," he added.

ECB 'should err on the side of caution'

The ECB published its latest financial stability report on Wednesday and suggested debt sustainability concerns had increased over the past six months amid a possible uptick in yields.

"Risks to financial stability stemming from financial markets remain significant," the Frankfurt-based institution said in its review. The ECB added a bond market re-pricing could "materialize via spillovers from higher yields in advanced economies, in particular, the United States."

Policymakers at Europe's central bank are poised to begin talks over the summer to discuss whether to taper its massive quantitative easing (QE) program. At present, the ECB's asset purchases resume at a rate of 60 billion euros ($67 billion) each month.

Constancio stressed that, from his perspective, it would be best practice for the ECB to tread carefully when considering amending monetary support. However, some on the central bank's governing council are more disposed to reining in QE given the strengthening economic growth in the region.

"If anything… if we have to err to (avoid) making a mistake, and I hope we don't make a mistake, but if we have to err we should then err in the direction of being cautious," he said.

'Never boring' at the ECB

Constancio began working as ECB vice-president in 2010 and is due to stand down in June 2018. Having aided the central bank during various so-called crises, he suggested the excitement and importance of such role meant his tenure was "never boring".