ECB BOND- BUYING PROGRAMME / THE FINANCIAL TIMES LEX ( RECOMMENDED READING )

ECB bond-buying programme

Published: Last updated: June 3 2010 16:45

Small steps are often the most effective. The European Central Bank has bought just €36bn of eurozone sovereign debt since its bond purchase programme began last month, out of a pool of €7,300bn. But it has achieved its admittedly narrow aim – to restore functionality to a frozen market. It targeted Greek, Irish and Portuguese paper in specific segments of the market. Grateful sellers – probably over-exposed banks – have thrown themselves at this lifeline, and some notably freakish developments have been unwound. Greek 2-year yields have fallen from 18 per cent on May 7 to 7.5 per cent now, for example.

Yet the eurozone government bond market remains friendless. There is no appetite for bonds that are not German, except from central banks. Spreads have started to widen again; Spanish 10-year paper yields 1.8 percentage points more than German equivalents. More worryingly, the Italian 10-year yield, at over 4.2 per cent, is back to where it was before the ECB intervention began. There are understandable though surely unfounded fears in Germany that the bond purchases are no more than hidden transfers to rescue French banks.

A better concern is whether the widening of spreads is because of ECB intervention or in spite of it. We may be witnessing a long term shift as investors pull out the dust-covered manuals on pricing risk they discarded when the euro was launched. This process has a way to go. Take Spain. Its bonds are not attractive because they do not offer proper reward for the risk involved in holding them. Spanish 10-year bonds yield about 4.5 per cent, and 10-year German bunds yield 2.7 per cent. For many investors, that spread is too narrow. It may be as simple as that.

Copyright The Financial Times Limited