European Central Bank President Mario Draghi has boxed himself into a corner.
Spanish and Italian bond markets rallied yesterday as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today.
“We still don’t think policy makers have done enough to make the market sit up and take note,” said Richard Urwin, head of investments at BlackRock Inc.’s Fiduciary Mandate Investment Team in London. That has left bond yields in weaker countries “too high to be sustainable,” he said.