The Spanish risk premium climbs to 130 basis points due to the lack of response from the ECB

MADRID, 13 Jun. (EUROPA PRESS) -

The risk premium offered to investors by Spanish 10-year bonds compared to their German counterparts widened this Monday to 130 basis points for the first time since May 2020, after the European Central Bank (ECB) did not provide details on how it will address the potential fragmentation of the eurozone sovereign bond market.

The return on the Spanish bond with a ten-year maturity stood at 2.865%, compared to 1.569% for the 'bund', which was the largest difference between the two since May 2020, when last January it oscillated around 70 points basis points and a year ago it was slightly above 60 basis points.

The spread of the ten-year Spanish bond with respect to the equivalent German bond, which consolidated above 100 basis points since the beginning of May, has accelerated its increase in the last week from around 110 basis points before the meeting of the ECB last Thursday to around 130 basis points currently.

At its last meeting, the Governing Council of the ECB undertook to raise interest rates by 25 basis points in July, the first rate increase in eleven years, as well as to raise the price of money again in September to a even more intense pace.

However, despite the fact that the president of the ECB, Christine Lagarde, insisted during the press conference that the entity "will not tolerate" a fragmentation of the euro zone debt market incompatible with the adequate transmission of the monetary policy of the institution, the lack of details on how the ECB will deal with this situation has fueled the divergence between yields.

In this way, apart from the Spanish risk premium, the spread between the 'bund' and the ten-year Italian bond has been above 240 basis points, while in relation to Portugal the Portuguese risk premium has also exceeded 130 basis points, when at the beginning of June the spread was around 200 and just over 110 basis points, respectively.

In her appearance before the press last Thursday, Christine Lagarde recalled that the ECB has instruments to combat fragmentation, such as the ability to reinvest debt acquired under the anti-pandemic program (PEPP), which will be implemented with total flexibility of time and jurisdictions.

"As we have already shown, we will deploy other existing instruments or those necessary to prevent fragmentation from impeding the proper transmission of monetary policy," he added, noting that there is no specific level of risk premiums or debt yields that could trigger the intervention of the central bank. "We will not tolerate a fragmentation that prevents the transmission of monetary policy," he concluded.

However, several analysts consulted by Europa Press indicated that same day that the lack of details in this regard could fuel tension in the following sessions.

"No details were given at the meeting and peripheral spreads widened accordingly," said Konstantin Veit, portfolio manager at Pimco, while Nicolas Forest, head of fixed income at Candriam, considered the end of quantitative easing (QE). as a clear threat to the financial stability of the euro zone, where the 'spread' of italy has widened significantly.

"Even if the markets are speculating on a spread control framework, no additional tool has yet been put forward. Therefore, the risk of market fragmentation is significant and there is no doubt that the ECB should provide details on a possible new tool in the coming months," he added.

Likewise, Pedro del Pozo, director of financial investments at Mutualidad de la Abogacía, considered Lagarde's explicit commitment against fragmentation "very important", but agreed that "the negative part is that it has not specified how".