The markets are already pricing in a rise in interest rates . The ECB itself has announced that interest rates will rise and, more importantly, will put an end to the massive purchases of public debt in recent years. This has a direct impact on the bonds of the most indebted countries such as Spain, Italy or Greece. Without artificial demand from the ECB these countries would have to put more debt on the market, which means they would have to pay more to investors in exchange for buying all that debt. As a result of this reality, the risk premium - the differential between the yields of ten-year German bonds and other European bonds - has increased. The German bond this year has begun to trade with positive returns and is trading with an IRR of 1.427% . Back to risk premiums Price drops in debt markets affect the rise in yields. And those countries with a more deteriorated economic-financial credibility tend to trade with risk premiums compared to the safe asset so that investors demand their debt.
And it is at this point that we have Spain and Portugal, which have reached a risk premium of around 140 points . Italy, which has reached 250 points and Country Email List Greece, which has reached close to 300 points. Cousins Some divergence in bond yields is not surprising in a monetary union of sovereign states with independent fiscal policies , and may translate into different financing conditions for the real economy. However, if they increase very sharply and at different maturities, this can cause excessive differences, encouraging fragmentation . Such market movements can strain the debt market, as in when the eurozone experienced a level of fragmentation that the ECB will want to avoid.
Despite everything, peripheral bond spreads remain far from thelevels and the rise in short-term yields has been relatively contained. The ECB wants to alleviate the rise in risk premiums As we have mentioned, the ECB plans to end its massive purchases of net debt on July 1. But on Wednesday, the ECB announced its decision to provide greater flexibility to the reinvestment of maturing debt in the "PEPP portfolio" to maintain the function of the monetary policy transmission mechanism, a precondition that the ECB can guarantee to the market . its price stabilization mandate. Regarding the Pandemic Emergency Purchase Program (PEPP), the Governing Council plans to reinvest principal payments in securities purchased through the program that mature until at least the end of 2024 . In any case, the deployment of the PEPP portfolio in the future would be an appropriate stance to avoid intervening in monetary policy. This measure comes in a context in which the ECB's balance sheet has reached another maximum in the meantime.