Davide Chiantore on the European Bond Market

Recently there has been a very delicate situation going on in the European Bond markets.
As the ECB was unable to communicate its monetary policy choices elegantly and clearly to the market in a recent unsuccessful meeting, investors and the public at large were left feeling insecure and confused.
This led to an explosion of yields on government bonds, particularly those of peripheral countries.
The situation was further aggravated by inflation in the United States, which reached 40-year highs. The result of this may have been an explosion in government bond yields, for example the Italian 10-year bond which rose above 4% yield, despite the ECB’s rates still being in negative territory.
This situation is extremely dangerous, not far from the one in 2011, so it is thought that the ECB absolutely must intervene, and quickly too, to calm the markets.
It is expected that Christine Lagarde will announce spread containment measures as soon as possible, while waiting for governments to implement structural reforms.
On the European bond secondary markets, we have seen a widening of spreads between bid and ask on the bond books and a reduction in liquidity. These are not good signs, as these events occur when investors find it hard to believe in the soundness of the countries they invest in.
The European Central Bank is not acting cautiously at the moment. It seems to have left the trend of benchmark rates, especially those on the secondary market, completely to chance.
It is undoubtedly a delicate situation.
We have benchmark rates at European level below zero, but at the same time bonds, such as Italian 10-year bonds, yielding more than 4%.
The problem stems from the lack of reforms in some Eurozone countries, with the main cause being the divergence of economic competitiveness between the various countries in terms of fiscal, organizational and bureaucratic efficiency.
The situation that lies ahead is one of rising rates, which can only exacerbate the tensions on government bonds as liquidity tends to shrink and yields, rather, tend to rise.
The market tends to anticipate the Central Banks’ moves, but in this case this forecasting is really important. It is possible to assume that in the coming months we will see the spread and yields of core and peripheral countries rise.
This situation puts heavy pressure on the balance sheets of the most indebted nations and countries like Italy that have to continually roll over their debt and then go out and look for new capital on the markets.
Between now and the end of the summer, Italy needs to allocate 130 billion to roll over maturing debt, which will cause a rise in the country’s funding costs, hence a further trend towards indebtedness.
The hope is that structural reforms will be carried out as soon as possible, especially in peripheral countries such as Italy, Greece, Spain and France. Without these reforms, the gap will tend to widen as it has in the past years and the situation will not improve.
The risk of a European break-up is increasing, this is also seen on the Forex market of the euro against the dollar, Swiss franc and yen. International investors have increased fears that the Eurozone could crumble and that in the future there could be an exit from the Eurozone of some countries with the break-up of the Euro itself.