ECB holds emergency meeting on risk premium escalation

ECB holds emergency meeting on risk premium escalation

The financial institution convened its council after economic indicators in Italy and Spain reached 2014 levels.

The European Central Bank’s (ECB) Governing Council will hold an emergency meeting on Wednesday to discuss market conditions. “The Governing Council holds an extraordinary meeting this Wednesday to discuss market conditions,” a central bank spokesman confirmed.

The meeting comes after the required yield on Italian or Spanish bonds reached 2014 levels this week, with 10-year transalpine bonds yielding above 4 percent and Spanish bonds at 3 percent.

“We will not tolerate changes in financing conditions that go beyond fundamentals and threaten monetary policy transmission”

  • Isabel Schnabel, German representative on the ECB Board of Directors
    Isabel Schnabel, the German representative on the ECB’s board of directors, stressed yesterday that the institution will not “tolerate” a disorderly rise in risk premium, which poses a risk to the transmission of monetary policy.

“We will not tolerate changes in financing conditions that go beyond fundamentals and threaten the transmission of monetary policy,” Schnabel said, speaking at an event in Paris.

Spanish 10-year bond rate falls from 3% before meeting
The return demanded by the secondary market for Spain’s 10-year bond fell from 3 percent to Wednesday, surpassing yesterday’s level for the first time since May 2014. ​Today I will maintain the program outside the meeting to analyze market conditions.

“The Governing Council holds an extraordinary meeting this Wednesday to discuss market conditions,” a central bank spokesman confirmed.

As such, Spanish 10-year bond yields fell to 2.942% in early Old Continent trade, having closed at 3.098% yesterday. Likewise, Italian 10-year bond yields fell notably at 3.972%, compared with 4.219% at Tuesday’s close.

The Spanish 10-year bond, which returned 0.395% a year ago, entered negative territory in December 2020 due to ECB intervention and has seen strong growth since before the shift in monetary policy at the end of January Central bank responses continued escalating inflation.

On the German side, Wednesday’s return of 1.718% brought the risk premium on Spanish equivalents down to 123 bps, compared with yesterday’s sharply over 130 bps.

The spread on Spanish 10-year bonds relative to their German counterparts has consolidated above 100 basis points since early May, accelerating last week to around 130 basis points from around 110 basis points ahead of last Thursday’s ECB meeting.

available instruments
Along these lines, ECB President Christine Lagarde recalled last week that the ECB has the tools to deal with diversification, such as the ability to reinvest debt acquired under the Epidemic Prevention Programme (PEPP), which will be a fully flexible approach to implementation. Timing and jurisdiction.

“As we have already shown, we will deploy other existing tools or those necessary to prevent fragmentation from hindering the correct transmission of monetary policy,” the French woman added, noting that there is no specific level of risk premium or debt returns can trigger central bank intervention. “We will not tolerate fragmentation that prevents the transmission of monetary policy,” he concluded.

The European Central Bank decided at its meeting last week to end its asset purchase program and announced it would raise interest rates by 25 basis points in July, with another rate hike expected in September, the strength of which will depend on the evolution of the inflation outlook.

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