The spread increased dramatically after the ECB announced that bond markets would close on July 1 and led analysts to forecast an increase of up to 1.5 points by the end of 2022.
Her perspective increase in European Central Bank interest rates for Inflation has ignited markets and pushed up interest rates on bonds in some eurozone countries, to the point where the European financial institution has been forced to intervene to reassure investors.
What is the state of interest rates?
The ECB announcement on 9 June that it announced faster than expected reduction of monetary policy to tackle inflation caused strong shakes in the bond market.
The bond purchases by the ECB will end on 1 July 2022while for the same month forecast increase of key interest rates by 0.25%, for the first time since 2011.
As a result, the interest rates of the most indebted countries increased more than the interest rate of the German bonds (Bund), which is also the reference point, as a sign of the negative attitude of the investors.
The spread increased dramatically following the ECB announcement last Thursday, which led analysts to forecast a total increase of 1.50 points by the end of 2022.
The interest rate on Italian ten-year bonds exceeded 4% on Monday, a level unprecedented for 8 years, while in the summer of 2021 it was at 0.50%. The difference with the Bund increased to 2.50 percentage points.
At the present time, “an increase in interest rates and spreads is normal, but there is an absurd dimension “on which the ECB can play, points out Gilles Moëc, chief economist at Axa Investment Managers.
Is there an underlying danger?
The current level of spread between Germany and Italy is rekindling the risks to Italian debt and the threat of a repeat of a debt crisis in the euro area after the 2011/2012 crisis.
During that crisis, about 5 percentage points separated the German from the Italian interest rates, which is twice the distance from today. In 2021, this distance was on average at 1.35 percentage points.
“Financial conditions in Italy are deteriorating much faster than elsewhere in the eurozone“As growth in the country falls short of dynamism,” said Franck Dixmier, director of bond management at Allianz Global Investors.
So fast, that this “Calls into question the Italian Government’s three-month plans”adds Gilles Moëc.
What are the signals emitted by the ECB?
The European Central Bank decided to hold an extraordinary meeting yesterday. The last time it held an emergency meeting was in 2020 to launch the emergency anti-pandemic program.
Yesterday, the ECB wanted to show that it is determined “To catch the bull by the horns”preventing interest rates from fluctuating in the eurozone and creating panic over Italian debt.
At the end of the meeting, the ECB confirmed that a new tool “against the fragmentation” of the bond market will be designed and charged its services to “speed up” the relevant procedures.
He also pledged to implement “Relative flexibility in reinvestment” of bonds held under the contingency plan implemented during the pandemic.
This specifically means that “Pending the specific tool, the ECB will use PEPP (Pandemic emergency purchase program) reinvestments, possibly buying Italian bonds”explains Franck Dixmier.
Regarding the rest of the content of this special tool, there is currently uncertainty, but the announcement of its creation was positively received, according to analyst Allianz GI.
After all, the situation in bond interest rates eased to a large extent after the ECB announcements.
“It is a necessary and sufficient condition for the absolute freedom of the ECB to implement its monetary policy, so that it does not hinder or slow down the increase of interest rates,” explains Franck Dixmier.
Moreover, the fact that it became known that “the ECB aims to tackle inflation, but takes into account what is happening in the market and especially at lending rates” has greatly reassured the market, in
