Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

In two speeches last week, European Central Bank President Mario Draghi was careful not to mention how and when his institution will reduce its quantitative easing program. His reticence on this key policy issue hasn't stopped spreads on peripheral bonds climbing in the past month.

Rising Higher
After reaching a low for the year at the start of August, the gap between Italian and German 10-year yields has widened
Source: Bloomberg

To be sure, Italy has domestic political issues at work. "Could Italy leave the euro?" was the question posed in a Friday research piece from Berenberg Bank. While the conclusion was that the risk remains low, the bank noted that support for anti-euro parties remains high ahead of elections likely to be held between March and May next year.

But it's not just Italy that's suffering wider spreads. Portugal and Greece have both seen their borrowing costs rise relative to those of Germany. Spanish 10-year yields, meantime, have posted a similar relative rise to those of Italy, suggesting there's more going on than just Italy's domestic political travails.

A Wider Issue
Spanish 10-year yields versus German bund yields
Source: Bloomberg

In absolute terms, borrowing costs for Europe's periphery are little changed in August. Ten-year funding costs for Italy and Spain are both up by about 8 basis points this month, Greece's yield is about 11 basis points higher while Portugal's is about unchanged.

What's really driving spreads wider is German yields, which marched higher in the month to mid-July amid increasing evidence that the euro zone economic recovery was becoming entrenched.

Down From the Highs
German 10-year yields have almost halved since reaching a high for the year in mid-July
Source: Bloomberg

These yields have since declined. The risk-off trades, with investors favoring German bunds to peripheral euro-zone debt, aren't restricted to fixed income. The backdrop to these bond moves is the foreign exchange market, where the euro has been on a tear. The other bark that Draghi failed to emit last week concerns the euro's strength: His silence was taken by traders as the trigger to drive the common currency past $1.20 on Monday. 

Silence Is Golden
The euro is at its highest against the dollar since the start of 2015
Source: Bloomberg

The stronger the euro, the harder the ECB will find it to meet its inflation target, with July's 1.3 percent gain in consumer prices already lagging the 2 percent goal by a wide margin. That makes it more difficult to justify scaling back the bond-buying program, which in turn drives down yields on scarce German government debt.

Draghi's next opportunity to name his various pains comes next week, at the Sept. 7 press conference following the ECB's policy meeting. He may choose to defer until October; but it's clear that with inflation likely to slow further, peripheral spreads widening and the euro showing no signs of losing momentum, Draghi's balancing act is getting even harder.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Mark Gilbert in London at
Marcus Ashworth in London at

To contact the editor responsible for this story:
Jennifer Ryan at