Let’s just call it the ECB bazooka, which was announced there yesterday. In addition to the existing programmes, the ECB is buying up 750 billion Euros of government and corporate bonds in the Eurozone until the end of the year. The ECB has discreetly pointed out that if the central bank purchases under this new “PEPP programme”, there will be a waiver of the admission requirements for bonds issued by the Greek government. In plain language: Greece in particular will be given a really decent support by the ECB by striking a blow there. Until now, Greek securities have been considered problematic because they do not yet have a “higher” rating than “investment grade”. But this has to take a back seat now – there is now a lot of buying!
ECB brings yields down
The result were seen yesterday. Threatening state bankruptcies in Euroland? A new Greek crisis, Italy ruined? No, quite the opposite. If the ECB now makes a big push on these bonds, the risk of default will naturally fall. And bang, the risk premium for these securities falls dramatically. Let’s first look at Greece. Yesterday the yield on ten-year Greek government bonds was 3.97 percent, today, with rapid movements, it is only around 2.40 percent. What a decline. You can see it well in the following chart, which goes back to February 19th. From March 12th, the yield shot up. The stock markets crashed, everything crashed (to put it simply). And the fear of state bankruptcies increased. And bang, the ECB as “the big buyer” brings back “confidence”, the yield goes down. After all, where should the risk be if the ECB gradually buys up everything? (yes, slightly exaggerated).
The yield on Spanish government bonds with a ten-year maturity has now fallen by 27 percent. The trend is similar to that of Greece, only not quite as pronounced. While the yield was at a high of 1.36 percent yesterday, it is now at 0.89 percent. And the problem child Italy? A similar course. The yield is falling by 20 percent today. Yesterday it was at a high of 2.95 percent, now it is 1.82 percent.