The monetary authorities of the European Central Bank (ECB) are holding an extraordinary council meeting this Wednesday to discuss the consequences of the recent sell-off in the bond market.

"The Governing Council will hold an ad hoc meeting on Wednesday to discuss current market conditions," a spokesman for the euro central bank said on Wednesday.

No further details were given.

The ECB announced a series of rate hikes on Thursday.

Since then, bond yields have risen sharply.

The yield difference (spread) between German government bonds and those of more heavily indebted southern euro countries, especially Italy, had risen to its highest level in over two years.

The ECB's response to a bond market panic will depend on the circumstances it is dealing with, Executive Board member Isabel Schnabel said in Paris on Tuesday night.

“How we ultimately respond to the risks of fragmentation depends entirely on the situation we face.

"We have shown in the past that we can adapt flexibly and quickly to the respective circumstances."

Thanks to safeguards in place, the risk of so-called fragmentation -- an "unjustified" rise in bond yields for the more indebted members of the euro area -- is less likely today than it was a few years ago, said Schnabel, who oversees markets at the ECB.

Strong commitment to the euro

Despite falling bond prices since the announcement of the ECB's tightening plans, Schnabel's comments reflect an emerging consensus in the Governing Council.

According to this, a hasty presentation of a new instrument brings hardly any advantages, but exposes the monetary authorities to the risk of being put to the test by the market.

Financial service Bloomberg reported in April that the ECB was working on a new tool to be used in the event of a bond failure in weaker euro area countries.

So far, the ECB has said it will only use funds from previous asset purchases to address potential problems.

Investors, accustomed to large-scale market interventions by the ECB, are not yet convinced that the central bank can raise borrowing costs while keeping bond yields of the region's most vulnerable members in check.

Italy's 10-year bond yields rose above 4 percent this week for the first time since 2014, while the yield spread over Bunds climbed to the highest level since May 2020.

Schnabel said the ECB would not tolerate "changes in financing conditions that go beyond fundamental factors and threaten monetary policy transmission."

She pointed to the ECB's Pandemic Emergency Purchase Scheme, which was flexible and temporary, and the concept of Outright Monetary Transactions as examples of policymakers' ability to respond to different types of market stress.

Former President Mario Draghi had put the latter in the room under the premise of “doing everything that is necessary” to save the euro.

There was no volume limit for this, but strict conditions.

According to Schnabel, the ECB can react to new emergencies with existing or new instruments.

"These instruments could be different again, with different terms, different durations and different safeguards to keep us firmly within our mandate," she said of assets could be sterilized to contain yield differentials.

This means that the liquidity created by the purchase would be withdrawn from the market.

The French council member François Villeroy de Galhau had already made a corresponding statement.

For her part, Schnabel said monetary policy “can and should” respond to a disorderly repricing of risk premia.

"Our commitment to the euro is our anti-fragmentation tool," she said.

“This commitment knows no bounds.

And our track record of stepping in when needed underpins that commitment.”