The European Central Bank is edging toward a bond-buying program that investors say could end up printing money, echoing efforts by the Federal Reserve and other central banks to fix a credit crisis nearing its sixth year.
ECB President Mario Draghi yesterday left open the question on whether the bank would neutralize future bond purchases, a step it has taken with all of its interventions to date. He also said the size of the new program would be “adequate to reach its objective” of curbing Italian and Spanish borrowing costs, a contrast with the “limited” scope of the previous approach.
Draghi said that any bond purchases would focus on short-dated securities, leading Spanish and Italian notes to outperform. The yield difference between Spain’s two-year notes and 10-year bonds widened 17 basis points to 254 basis points, the most since May. The so-called spread between Italian two- year and 10-year securities reached 276 basis points, the most since March.
The yield premium investors demand to lend to Spain rather than Germany for 10 years rose to as much as 605 basis points from 536 on Aug. 1. The average this year is 423. Italy’s 10-year yield premium to bunds jumped 54 basis points since Aug. 1 to 510.