What are the risks to the euro-zone government bond market and is there a level of yields or spreads where the ECB would intervene?
Our forecast is that peripheral spreads will rise further in the near term. Obviously, the ECB has launched this Transmission Protection Instrument, but it's clear from the recent comments of policymakers that they don't see a need now to activate it and that they would rather not activate it if possible. They've also set out a series of conditions under which they would activate the mechanism. For example, that the increase in spreads needs to be an “unwarranted” and “disorderly”, which are terms that are very much open to interpretation. We suspect that government and Council members may not agree on what exactly they mean so we suspect that even if spreads were to rise a bit more, initially at least, the ECB might hesitate to act and that might cause investors to further test the ECB’s resolve. There's certainly reason to think the direction of travel for spreads is more likely to be upwards Because ECB tightening is not good news for the fiscal position of vulnerable peripheral countries. Only after spreads have risen more may the ECB intervene to bring them down. Our forecasts are for spreads to rise more before the end of the year but then, at some point, the ECB will activate the TPI so we definitely see the ECB at some point having to add again to its government bond holdings.