The European Central Bank slowed the pace of its controversial buying of government bonds to a near halt last week, adding substance to suggestions from one of its top policymakers that the programme could soon be phased out.
The ECB started buying government bonds from the secondary market on May 10 in response to the Greek debt crisis, which was threatening to lock higher-debt euro zone members out of the bond markets.
It said on Monday it had bought just 1 billion euros worth of bonds last week, taking the overall total to 60 billion euros but bringing new purchases to a virtual standstill.
The slowdown comes after the ECB spent 4 billion euros per week for three weeks running. The central bank initially resisted political pressure to buy government bonds during the euro zone's debt crisis because it feared the purchases could be inflationary, and only agreed to launch its programme in early May as part of a broader package of measures by the European Union to prevent countries from defaulting on their debt.
ECB President Jean-Claude Trichet pointed to the slowdown in buying as a possible trend last week, while ECB executive board member Juergen Stark said on Friday that the programme could be brought to a close if bond markets continued to improve.
The ten year Portuguese government bond yield which soared to a peak of 6.61 percent just before the ECB began buying the bonds of weak states on the euro zone's southern periphery was at 5.44 percent on Monday, although it remained well above levels of around 4.5 percent seen earlier this year.
My hunch is that if there is a sense that the market is returning to some kind of normality then they could remove the support and see how the market reacts, said Deutsche Bank economist Gilles Moec.
Considering buying government bonds was so contentious within the Governing Council I wouldn't be surprised if they tried to stop as soon as possible, although they would have to leave the door open to return to it.
Axel Weber, who heads Germany's influential Bundesbank, has expressed serious reservations about the purchases, which tread dangerously close to the ultimate ECB taboo of financing government debt.
Moec said the ECB could pull out of markets in the coming months, adding that it would be a safe move as long as the recent improvement was sustained.
If things continue to improve as they have been doing over the last few days then they could certainly remove it. Certainly over the summer, maybe in September.
It would not be premature if the current improvement continues, he said.
The euro rose roughly two ticks against the dollar after the purchased amount was announced. German bond yields, which move inversely to prices, were lower across the curve by 1600 GMT with the two-year Schatz yield falling the most.
The two-year yield had risen sharply in recent sessions, tracking the rise in money market rates following a drop in excess liquidity after banks repaid 442 billion euros of one-year loans to the European Central Bank on July 1.
As in previous weeks, the ECB will take one-week deposits from commercial banks on Tuesday to counterbalance the extra money that flows into the financial system when it buys bonds, and thereby neutralize any major inflationary threat.
Banks will be offered up to 1 percent interest on the money they park at the ECB, while the ECB said it would hold a repeat operation next week. (For full details click)
A number of key details about the buying programme have been kept secret by the ECB, such as how much it could spend or how long it intends to buy bonds.
The actual purchase amount could be higher than the reported total, given that it takes 2-3 days for purchases to settle.
(Reporting by Marc Jones; editing by Ron Askew)