European Sovereigns

10-year government bonds ECB may decide on emergency support measures in June

Sovereign CDS spreads 5-year European sovereign CDS spreads (GER, NL and FR left, IT and SP right)

Sovereigns Europe - Market observation per 17 May 2021 -

Eurozone government bond yields across Europe increased sharply

  • Early May ’21, Dutch, German, French, Italian and Spanish government bonds rose approximately 10 bps in only one week
  • German 10-year yields approach 0% and Dutch 10-year yields are even slightly positive, reaching the highest levels since 1.5 years
  • The sharp increase is triggered by a jump in US inflation figures

ECB could be encouraged to slowdown its emergency support package

  • Investors anticipate on the possibility that the ECB could be encouraged to slowdown its Pandemic Emergency Purchase Programme (PEPP)
  • A robust economic recovery fuelled by swift vaccine rollouts, combined with a jump in inflation, could drive the ECB’s policy makers to debate whether to start reducing emergency support measures
  • PEPP is set to expire in March ’22 at the earliest and will not end overnight. It could take several quarters to narrow down the program, which currently consists of EUR 80bn of bond purchases per month
  • Albeit debate around PEPP, the ECB announces it would provide plenty of support for years to come in order to support inflation and return it to the inflation target
  • ECB’s standpoint on emergency support measures is expected to be on the agenda of the June meeting

The costs of insuring exposure to debt issued by European governments stabilized further in Q2 ’21, except for France

  • France’s credit default swap (CDS) spreads increased sharply in Q2 ’21, increasing with more than 40% in just 7 weeks
  • CDS spreads of the Netherlands, Italy and Spain have steadily returned to pre-Covid levels whereas German CDS spreads are still slightly elevated