The ECB’s Toxic Bond Buying Program by Lars P. Feld, et al

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It is unclear why the European Central Bank has introduced a new asset purchase instrument instead of using its existing monetary securities transaction mechanism. By shielding countries from market forces and political commitments, the transport protection instrument risks destabilizing the European monetary union.

BERLIN As Eurozone inflation rises rapidly, the European Central Bank recently raised its benchmark interest rate by 50 basis points and introduced a new asset purchase program, the Transmission Protection Instrument (TPI ), aimed at limiting the yield spreads between the bonds of the Member States. But the ECB’s latest anti-fragmentation tool risks destabilizing the single currency.

Market interest rates in the euro zone, including those on government bonds, have risen sharply since the end of 2021 as investors want to be compensated for higher inflation and have already priced in the policy tightening monetary. Along with the rise in yields, interest rate differentials within the euro area have also widened, with interest rates rising more sharply in countries with higher public debt-to-GDP ratios and growth prospects that deteriorate.

For example, while ten-year German government bond yields rose from -0.33% to 1.75% between early December 2021 and mid-June 2022, Italian ten-year bond yields rose from 1.02% to 4.27% over the same period. . The yield spread thus increased by 1.17 percentage points.

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