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Investor Strategy

Italy’s Bonds Recover as ECB’s Lagarde Walks Back Spread Comments

imageForex6 hours ago (Mar 12, 2020 12:09PM ET)

(C) Reuters.

By Geoffrey Smith — Italian government bonds and bank stocks recovered somewhat after European Central Bank President Christine Lagarde walked back earlier comments when she appeared to leave responsibility for supporting the Italian economy to eurozone governments. .

The yield spread between 10-year Italian and German government debt had widened to its most in nine months during Lagarde’s press conference, when she affected indifference to a selloff that has gathered pace in recent days as the coronavirus emergency has revived fears for the country’s debt sustainability.

“We are not here to close spreads, there are other tools and other actors to deal with these issues,” Lagarde had said.

The comments contrasted sharply with the approach taken by her predecessor Mario Draghi, whose promise to do “whatever it takes” to save the euro was a direct response to markets driving the German-Italian yield spread to unsustainable levels for the Italian government and banking system.

“I am really committed to avoid any fragmentation in a difficult moment for the euro area,” Lagarde said later in an interview with CNBC, referring to Draghi’s arguments that high spreads mean that the ECB is effectively no longer setting a single interest rate for the currency zone. “The high spreads that we see due to the coronavirus clearly impair monetary policy.”

Lagarde also told CNBC that the ECB would use the measures it announced on Thursday, including the expansion of its bond-buying program, “forcefully, with determination, and using the flexibility that we have.”

Markets were still only half-convinced by the clarification. By 12:04 PM ET (1604 GMT), the spread was back at 247 basis points, still 50 basis points wider than before the ECB announced its package of easing measures. In absolute terms, the Italian 10-year benchmark yielded 1.79%, up 60 basis points from Wednesday and its highest since last August.

Italian bank stocks, meanwhile, were still among the worst performing in Europe, losing between 15% and 18%. Italian bank stocks are closely correlated to the sovereign spread because of the enormous amount of Italian government bonds on their balance sheet.

Italy’s Bonds Recover as ECB’s Lagarde Walks Back Spread Comments

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