While the Fed seemingly felt confident enough to aggressively hike rates this week, the ECB was forced to make defensive and vague promises about saving "fragmenting" Euro bond markets.
ECB President Lagarde dropped a hint of having some 'tools', then yesterday's "Emergency Meeting" confirmed the central bank was in panic mode as it jawboned promises of doing 'whatever it takes' again to rescue peripheral bond spreads from blowing out.
Perhaps it was the risk of 'Italeave' that triggered the bureaucrats into action…
And this morning more details are coming out about exactly what the anti-fragmentation tool will look like.
Bloomberg reports that, according to people familiar with the matter, bond-buying under any new anti-crisis tool from the European Central Bank would probably involve selling other securities so purchases don’t upset efforts to curb record inflation.
Yesterday's emergency meeting of the ECB’s Governing Council sped up work on the new instrument after a selloff in Italian government debt stirred memories of Europe’s sovereign-debt crisis. While the renewed push to tackle so-called fragmentation calmed markets somewhat, it’s fueled expectations of a concrete announcement in the coming weeks.
The ECB also reiterated that it will use reinvestments of maturing debt from its pandemic-era asset-purchase program, known as PEPP, more flexibly.
For now, the jawboning alone – as usual – has improved the situation as European peripheral sovereign spreads have compressed notably…
However, while at first glance ithe new anti-frag tool looks like it may be a re-hash of the Securities Markets Program of more than a decade ago, Bloomberg's Lorcan Roche Kelly notes that the difference between selling assets to offset purchases rather than running outright sterilization operations like we saw under the SMP is key.
The implication of selling some assets to buy others is that core nations may see added weakness when peripheral buying is needed. This means that the ECB could actually be closing spreads both from the bottom up (selling core) and the top down (buying periphery).
Days like today where German yields blow out while moves in Italy remain muted could become a more common sight.
Of course, the idea of The ECB hard at work fighting inflation on one hand while buying peripheral bonds to compress spreads on the other is being accepted as totally normal by many market participants as The ECB's unquestionable omniscience continues…
The ECB will fight inflation on even days with higher rates and no QE, and fight bond market fragmentation and soaring Italian yields on odd days with NIRP and QE.
— zerohedge (@zerohedge) June 15, 2022
How long governing council members from those nations will put up with this is anyone's guess?