Thursday, May 13, 2010

Euro Bond Spreads: Impact of Policy

by Bill McBride on 5/13/2010 02:44:00 PM

Here is a graph from the Atlanta Fed weekly Financial Highlights released today (graph as of May 12th):

Euro Bond SpreadsClick on graph for larger image in new window.

From the Atlanta Fed:

European bond spreads (over German bonds) narrowed considerably this week following the unveiling of the European Union’s €750 billion policy response on May 9, jointly with the International Monetary Fund.

In addition to the €750 billion package, the European Central Bank announced its Securities Market Program, aimed at purchasing public and private European debt.

During the past few weeks, the 10-year Greece-to-German bond spread had risen to nearly 10% (or 1000 bps), but following the €750 billion EU/IMF package, the spread fell sharply to around 450 bps, as of May 11. Other European peripherals’ spreads also narrowed, with Portugal currently at 152 bps, Ireland at 165 bps, and Spain at 100 bps.
This is the series to follow to see the short term impact of the policy response. The spread for Greece has fallen sharply, but is still very high. The spreads for Portugal, Ireland and Spain have all fallen back to earlier levels.