Why Europe Has a New Weapon for Bond ‘Fragmentation’ 

The European Central Bank is trying to avoid a sovereign-debt storm after raising interest rates for the first time since 2011. It’s concerned about how markets might push up borrowing costs for some of the more vulnerable nations that use the euro -- such as Italy. That sort of potential blowup in government bond yields is known as “fragmentation.” So the ECB has devised a new weapon to curb market stress, a signal of its determination to fight the forces that almost destroyed the common currency a decade ago.

The term refers to a jump in borrowing costs for weaker euro-zone countries relative to stronger ones. While the currency bloc’s 19 economies differ by metrics like inflation, economic growth and debt, policy makers say some market moves don’t reflect these fundamentals and are too rapid. The states with the highest ratios of debt to gross domestic product -- notably Greece and Italy -- had some of the highest bond yields among major nations in June. The effort gained urgency after the yield on 10-year Italian bonds breached 4%, the highest since 2014. What’s more, the difference in yield, or spread, above Germany, the continent’s benchmark, had widened. Making matters worse is a collapse of the government in Italy, which could test the ECB’s resolve.