The central bank struggles to control fragmentation in eurozone debt.
Last time European Central Bank (ECB) Governor Lagarde forward guided the markets, she said a hike of 25 bps would be appropriate in July. But it seems forward guidance is now dead in Europe, just as it is in the US, as the ECB surprised with a rate rise of 50 bps to bring an end to the negative rate environment that has been in place since 2014. This is the first rate hike in 11 years as it finally addresses the inflation dynamic across the eurozone. As part of its triage policy against a fragmenting bond market, it announced a new antifragmentation tool – the transmission protection mechanism. This may well need to be deployed soon given the direction of travel in Italian bonds right now following Prime Minister Draghi failing to hold the coalition together and resigning this morning. European bonds are predictably shifting higher in yields across the curves with the euro catching more of a bid but the real action is in Italian debt with the 10-year yield rising 20 bps to 3.57% – that is 2.2% higher than German equivalent debt and now yields more than Greece. Fragmentation?
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator for the current or future development.