By Sergio Goncalves
LISBON – The new instrument being designed by the European Central Bank will show its determination to fight the risk of bond market fragmentation, but there will be no goal for specific yield spreads, governing council member Mario Centeno said on Friday.
The ECB agreed at an emergency meeting last week to create a new tool to contain divergence in borrowing costs, after yields rose on government bonds issued by indebted countries in the bloc’s south, widening their differential with low-risk Germany.
Centeno said the new instrument will “fight the risks of fragmentation” as monetary policy is gradually normalised, but that “there is no single typology of indicators to measure the materialization of fragmentation”.
“There is no goal regarding specific yield spread values,” he told reporters.
Centeno said the risks of fragmentation had to be dealt with “in their genesis and not afterwards” and that the instrument “will certainly demonstrate the determination of the euro system and the council of governors in containing these risks”.
The spread between 10-year Portuguese bonds and German Bunds, hit more than 140 basis points before the ECB’s announcement last week but had shrunk to around 108 basis points on Friday.
In January 2012, at the height of the euro zone debt crisis, Portugal’s 10-year yield reached around 18% and its spread against Bunds soared to over 1,500 basis points.
The ECB plans to raise interest rates by 25 basis points in July, its first increase in over a decade, and again in September, when the rise could be larger if inflationary pressures do not ease.
Euro zone inflation hit a record-high 8.1% last month.
Centeno said inflation in Europe has an important component imported from the United States, “where the inflationary phenomenon happened earlier”.
“The U.S. economy recovered pre-pandemic demand levels in the summer of 2021, in Europe this has not yet happened,” he said, citing “wage pressures, which are not felt in Europe”.