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UPDATE 3-ECB slowed bond buys last week even as market tanked

* Weekly tally shows drop in purchases

* ECB blames bond redemptions

* Lagarde says ECB won’t allow tightening (Adds Lagarde, chart)

FRANKFURT, March 1 (Reuters) - The European Central Bank slowed its net purchases of debt last week even as borrowing costs jumped in the financial markets, casting a shadow over a nascent recovery in the pandemic-stricken euro zone economy.

ECB policymakers, including President Christine Lagarde on Monday, have been dropping hints that the central bank is ready to rein in yields and make good on its promise to keep financing conditions favourable for euro zone governments, companies and households still struggling with the COVID-19 pandemic.

But the ECB’s weekly update showed the central bank bought just 13.7 billion euros worth of debt across its stimulus programmes in the five days to Feb. 26.

This compared with 23.2 billion euros a week earlier and an average of 23.9 billion euros since the ECB launched its Pandemic Emergency Purchase Programme (PEPP) in March 2020 to halt a much larger market rout during the pandemic’s first wave.

An ECB spokesman said the decline was due to “much higher redemptions” in the latest week, referring to bonds held by the central bank that matured over that period.

But some investors were left scratching their heads.

“The timing is quite unfortunate because they were sending a very strong signal last week,” said Frederik Ducrozet, a strategist at Pictet Wealth Management. “At the very least it increases the pressure on them to deliver the week after”.

ECB President Lagarde reaffirmed on Monday the central bank would not allow financing costs to rise too soon.

The French and Greek central bank governors were more explicit, openly calling for increased PEPP purchases.

But ECB board member Isabel Schnabel, who is responsible for the quantitative easing schemes, was more cautious, saying last week that a rise in yields could be welcome if it reflected improved growth prospects.

The ECB’s weekly data includes trades executed by the close of business on Wednesday, which then take two days to settle on the central bank’s account.

The surge in yields has largely been blamed on talk of reflation or even economic “overheating” in the United States, where the new administration is working on a $1.9 trillion stimulus bill.

Supply bottlenecks due to stranded container ships were also cited.

Tracking U.S. Treasuries, Germany’s 10-year yields , the euro zone’s benchmark, notched their biggest monthly rise for three years in February, gaining 26 basis points.

But they remained negative, at -0.3%, as they fell for a second day on Monday, hovering around levels last seen in June.

Reporting by Francesco Canepa; Editing by Hugh Lawson/Mark Heinrich

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