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European Central Bank policy makers are allowing ample leeway for the deployment of their bond-buying firepower as a first defense rather than imposing targets or thresholds, according to people familiar with the matter. 

Officials opted to grant more freedom of action for now rather than imposing strict rules governing how market operations departments around the region should buy up debt as an initial step to prevent turmoil, the people said, declining to be identified because the discussions are private. 

The ECB will start on Friday to apply flexibility to how reinvestments from its 1.7 trillion-euro ($1.8 trillion) pandemic bond-buying portfolio are allocated. 

The measure is an immediate tool to curb unwarranted movements in government bonds as interest rates rise from record lows. Officials are also devising a more potent instrument to use as a backstop. 

The regime governing the use of reinvestments may still evolve in due course, the people said. Meanwhile room for maneuver in deploying the first defense won’t go so far as to allow front-loading of purchases, another person said. 

That would mean bonds of more vulnerable countries can only be bought once securities have matured and funds are freed up. 

A spokesperson for the ECB declined to comment on how the reinvestment tool will operate. 

About 17 billion euros of bonds expire each month, with about 12 billion euros of that coming from core countries, people familiar with the matter have said previously. That money that can be redirected to struggling markets.

“Redemptions can, as appropriate, be invested within the Eurosystem in bond markets of jurisdictions where orderly transmission is at risk,” ECB President Christine Lagarde said on Tuesday in Sintra, Portugal, where the ECB is holding its annual retreat. “We have decided to apply this flexibility in reinvesting redemptions coming due in the PEPP portfolio as of 1 July.” 

That date is also when policy makers will cease asset purchases as part of their quantitative easing stimulus. That suggests the activation of the reinvestment measure  is happening in time to allow continuity in the ECB’s market interventions.

Lagarde convened the Governing Council for an emergency meeting this month after yields on Italian 10-year bonds jumped above 4%. Aside from committing to apply flexibility to reinvestments, officials pledged to accelerate work on a dedicated tool to address potential turmoil. 

Details are being thrashed out by central bank staff, with a view to presenting options for the design of the new tool to officials when they meet on July 20-21 to discuss policy. That decision has also been flagged as the moment when the ECB will enact its first rate increase since 2011. 

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