Italy Bond Drop Amid Global Rout Shows Limits of ECB Protectionby
Yield spreads between peripheral and German bonds widen
Portuguese-German yield spread touches most since July
Europe’s higher-yielding government bonds are showing that the European Central Bank’s protection has its limits.
While German bonds climbed on Wednesday as a selloff in oil and equities accelerated, Spanish and Italian securities slumped. Meanwhile, the yield spread between Portuguese bonds and their German equivalents reached the widest since July, surpassing levels reached when the Iberian nation’s government fell last year.
The ECB’s 60-billion-euro ($65 billion) monthly bond buying has largely shielded peripheral debt from such sharp selloffs in the past year, with Wednesday’s split more redolent of the moves seen during the region’s debt crisis. Greek bonds, which are excluded from the ECB’s program, fell, with 10-year yields reaching their highest level since August.
“There is only so much the ECB’s PSPP can do,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London, referring to the European Central Bank’s Public Sector Purchase Program, which started in March last year. “The picture looks very different to how it was a year ago. The periphery was the clear best macro trade out there. Now there aren’t the kind of crowds to buy these bonds, it is more a case of investors being selective.”
Aside from the drop in risk sentiment triggered by the commodity rout, Europe’s so-called periphery bonds are also being hurt by country-specific woes.
The delay in creating a bad bank in Italy is driving down lenders’ stocks and bonds, in a move which has now spread to the sovereign market. Investors are also wary of Portugal after some Novo Banco SA bondholders were forced to take losses on their investments.
Portugal’s 10-year bond yield jumped 15 basis points, or 0.15 percentage point, to 2.92 percent as of 4:40 p.m. London time. The 2.875 percent security due October 2025 fell 1.265, or 12.65 euros per 1,000-euro face amount, to 99.64. Similar-maturity German bund yields dropped six basis points to 0.49 percent.
That left the yield difference, or spread, between Portuguese and German 10-year bonds at 2.43 percentage points, having reached 2.45 percentage points earlier, the widest since July.
The yield on similar-maturity Italian bonds climbed nine basis points to 1.64 percent, while that on Spanish 10-year securities increased eight basis points to 1.78 percent. Greek 10-year bond yields rose 95 basis points to 10.12 percent and touched 10.15 percent, the highest since Aug. 21.
The ECB “has been the main spread-tightening force” in European government bonds, Chatwell said. “But now you see there has been so much widening in the credit world, it was just a matter of time before it hit the sovereign spreads. It’s happened today. I think peripheral spread direction from here is now not under the influence of PSPP any more.”