ECB meets to tackle rout in bond market amid echoes of debt crisis

European Central Bank's policymakers were holding a rare, unscheduled meeting on Wednesday to discuss a blowout in borrowing costs for some euro zone nations, fanning speculation the bank may be gearing to act to calm markets.

Yields of bonds issued by Italy and other debt-laden nations have risen sharply since the ECB flagged a series of rate hikes last Thursday and wound down a debt-buying programme in the face of soaring inflation.

Facing the threat of a repeat of the debt crisis that almost brought down the single currency a decade ago, ECB's policy-setting Governing Council was meeting to discuss how to respond to recent market turmoil.

Investors have pushed the spread between the yields of German bonds and those of more indebted southern nations to their highest since the height of the pandemic two years ago - a sign of waning confidence in those countries.

"The Governing Council will have an ad-hoc meeting on Wednesday to discuss current market conditions," an ECB spokesperson said.

News of the ECB meeting sent the euro surging over half a percent to 1.0487 against the dollar , 10-year Italian yields fell 22 basis points and Italian stock futures rose sharply.

The meeting started at 0900 GMT and it was likely to be followed by an early afternoon statement, people with direct knowledge said.

Options open to the ECB to fight so-called fragmentation - when some countries face markedly higher borrowing costs than others - include channelling reinvestments from maturing bonds into markets experiencing stress.

But some analysts have warned such a move alone is unlikely to be enough, so ECB policymakers could also devise a brand new instrument. Work on one started earlier this year but no progress has been made since April, sources told Reuters before the meeting.

Invitations to the meeting were sent out on Tuesday and some policymakers, who were expected to attend a conference in Milan on Wednesday, called off their appearances.

The meeting comes on the same day that the US Federal Reserve is expected to hike interest rates, with investors dramatically raising their bets for a 75 basis point increase, a swing in expectations that has fuelled a violent sell-off across world markets.

Earlier, 10-year German yields , a benchmark for the 19-country currency union, had hit 1.77%, their highest level since early 2014 while their Italian counterparts jumped 240 basis points higher, the largest spread since early 2020.

Italy sold 2.5 billion euros of a seven-year bond due on 15 June , 2029 at a 3.75% gross yield - the highest since October 2013 and sharply up from 2.39% at the previous auction.

The debt crisis a decade ago only ended when then President Mario Draghi pledged to do "whatever it takes" to save the euro and followed that promise with an unprecedented - and until now unused - bailout scheme.

There were echoes of Draghi's tone in a speech by ECB board member Isabel Schnabel late on Tuesday.

"Our commitment to the euro is our anti-fragmentation tool," Schnabel, a German, said. "This commitment has no limits. And our track record of stepping in when needed backs up this commitment."

She added the ECB was "closely" monitoring the situation and was ready to deploy both existing and new tools if it found that the market repricing was "disorderly."

But Schnabel argued against pre-emptively announcing a tool as it would need to be tailored to a particular situation with conditions, limits and safeguards set on a case-by-case basis.

"We should get a statement along the lines reflecting a willingness to act and then maybe they will also task committees to work on options, this is what was missing from last week," Pictet Wealth Management economist Frederik Ducrozet said.

The last time the ECB held an unscheduled meeting during market stress it rolled out the Pandemic Emergency Purchase Programme, a 1.7 trillion euro ($1.78 trillion) bond buying scheme that proved to be its main tool during the COVID-19 pandemic.

($1 = 0.9542 euros)