In the past two years, there have been times when the European Central Bank (ECB) bought bonds to help keep bond yields from rising through its Securities Market Programme (SMP). It began in June 2010 and the central bank has accumulated 210.5 billion EUR worth of bonds.
However, the ECB announced on Monday that, once again, it did not buy bonds last week. Although it marked the 15th consecutive week of pause from the bank, the announcement still came off as a surprise to some.
A few market junkies expected ECB President Mario Draghi to have acted already since Spain’s bond yields crept higher towards unsustainable levels. Last week, interest rates on 10-year Spanish bonds spiked up to 6.9%.
Unfortunately for the euro zone’s fourth largest economy, yields continue to rise and there’s still no sign that central bankers are gonna do anything about it. Earlier this week, 10-year Spanish bond yields skyrocketed to their euro area highs at 7.23%. Yikes!
This is awful news for investors because Spain can hardly afford to pay interest rates over 7%. Also remember that Portugal, Ireland, and Greece were forced to ask for bailouts when yields on their government bonds spiked to this level.
So why the heck is Super Mario not saving the day?
For one thing, mindlessly buying peripheral bonds distracts the ECB from its mandate, which is to maintain price stability.
Some market geeks also say that Draghi is being a good papa by teaching politicians a lesson or two on teamwork and responsibility.
Euro zone officials are now forced to find a solution to their problems rather than looking to the ECB for an easy way out and directly asking the bank to buy government bonds. And judging by the news that we’ve been hearing lately, it seems that Draghi’s plan is working!
G20 leaders are expected to unveil their plans on the EFSF and the ESM over the next couple of days after they work out the details in their latest meeting. Euro zone officials will most likely take credit for the decision, but we all know that it’s Draghi who has left them will little choice but to act.
Could it be that, like a true hero, Draghi is simply waiting for the best moment to save the day? Market bees are buzzing that the 7.50% mark on the 10-year Spanish bond yields is the central bank’s line in the sand before it resorts back to its SMP program and start buying bonds again.
Meanwhile, those who aren’t looking at any hard number believe that the ECB will wait for more proof that Spain is indeed having trouble getting access to markets. Last time I checked, Spain still met its targets in its latest auctions even though it had to cough up higher yields.
So like most central banks all over the world, it seems that Super Mario is on a wait-and-see mode for now. We probably won’t see any ECB action at least until after the EU Summit which will take place on June 28 to 29.
The question is, will there still be time for the ECB to save the day then?