Help Italy undermine the free market

From 3.90 percent yesterday evening, the yield on 10-year Italian government bonds rose to 4.08 percent by 13 today. The “free” bond market thus reduced yesterday afternoon’s announcement by the ECB to absurdity. Because the ECB had announced in an emergency meeting that it would buy more and more bonds of the Southern Eurozone countries so that yields do not rise too much.

But what do we see now? From 13 today, the yield on Italian bonds fell again to 3.94 per cent. This is due to current reports from ECB circles, according to which the greater purchases of Italian government bonds by the ECB under the new anti-crisis instrument should be offset by the sale of other government bonds. So you don’t just want to intervene in the interests of southern countries like Italy or Greece by investing more in maturing bonds there. Furthermore, now they want to sell off their shareholdings in bonds, for example from Germany, and buy the Italian ones for them. ECB circles also say that flexibility could also mean that the ECB buys new bonds before the older bonds mature.

The ECB therefore underlines its claim that fragmentation, i.e. an even greater divergence in government bond yields in the euro area, should be avoided. What you do with it, however, is that it increasingly threatens the free market. There should be no independent movement of the bond markets. However, the question might be asked: How should institutional investors recognize the likelihood of default for a country’s debt if yields cannot reflect this as a risk premium?

Well, for years investors and observers had gotten used to the ECB artificially pushing yields down, which undermined any pricing of risk. But now that the ECB has just announced the end of bond purchases for July, shouldn’t market forces return to their free play? But as soon as the markets resumed taking effect in terms of steeply rising yields, the ECB shows that it does not want to let that happen. The free market should not and should not work, certain returns should remain in the basement.

In the TradingView chart, we see the Italian 10-year yield trajectory since June 2nd. The premium over the German government bond is now “only” 2.03 percent after this morning’s 2.30 percent.

10-year Italian government bond yield from 2 June

Read and write comments, click here

About the author


Leave a Comment