A recent surge in government bond market volatility can be blamed on the quantitative easing program of the European Central Bank, according to one of Europe’s top financial regulators.

EIOPA, the body responsible for regulating insurers and pension funds in the European Union, has warned that the ECB’s decision to buy billions of euros’ worth of sovereign bonds, to kick-start the region’s economy, has caused markets to become choppier.

The suggestion, contained in the regulator’s 2015 financial stability report and published Monday, marks an unusual public warning from an official EU body about the impact of the ECB’s actions on investors. The ECB declined to comment.

Although the cost of borrowing for governments is still at historically low levels, it has risen sharply in recent weeks. The effect has been particularly dramatic in German bunds, previously among the most stable assets in Europe.

The sharp moves in government bond prices are due to the ECB taking so many bonds out of circulation, according to EIOPA. This means other investors’ decisions to buy and sell have a relatively bigger impact on prices.

EIOPA published charts showing that volatility in some sovereign bond prices has increased by nearly 300% since the ECB program was announced in January.

“The [ECB] program substantially reduced market volume for some asset classes, which significantly increased volatility,” the regulator’s report said. It said that, in the long run, the ECB’s action would improve conditions for investors, but carried short-term risks, including the fact that “the liquidity of sovereign bonds used for the [ECB] program was dramatically reduced which in turn has caused an increase of volatility.”

Liquidity, a measure of how easily investors can buy and sell an asset without affecting its price, has already been drying up as investment banks retreat from their former role acting as buyers and sellers in the middle of the market. Regulators and investors have warned that the lack of liquidity could damage financial stability.

Benoît Coeuré, a member of the ECB’s executive board, recently warned that liquidity has diminished, but he didn’t suggest the central bank’s actions could be a factor.

Andreas Utermann, chief investment officer at Allianz Global Investors, which manages €412 billion, agreed that the ECB’s intervention has caused volatility to rise, but said there are other factors at play too.

“[The ECB’s buying] has definitely led to an increase in volatility and that’s just one of the contributing factors,” he said, adding that investment banks’ reduction in trading activity is a major factor.

Source: The Wall Street Journal