Two weeks ago Spain neared the edge of the cliff, but they have just moved back a few steps. Beforehand there were some extremely tense moments when the risk premium, measured by the difference between yields on Spanish and German 10-year bonds, reached 500 basis points, or 5 percentage points.
This happened the week of November 18. One step further and a collapse would have been inevitable. But all of a sudden, yesterday the risk premium receded significantly. In only one day, it relaxed 356 basis points. The most recent break, added to what improvements were harvested this week, meant that in hardly ten days the risk premium has dropped 30%.
Optimistic Expectations
Yesterday sales of Spanish, Italian, Belgian and French debt increased significantly, but as a result, yields dropped as they tend to do when the price of debt rises.
What unchained this buying spree in only one day? A heap of reasons, this time all positive. On the one hand, European Central Bank (ECB) president Mario Draghi delivered an optimistic message about the possibility of lowering interest rates next week, which suggested that deep down he truly wants to enact more measures such as buying more bonds provided that politicians also lend a helping hand. Yesterday, the purchasing arm of the ECB did not make much known. ?We get the feeling that the ECB is buying very little,? said a fixed income investor from a Spanish firm.
At the same time, the six largest central banks in the world still have to follow through with their liquidity stimulus package that they drew up on Wednesday. ?For as many untapped opportunities that have passed by already, all the countries that underwent interventions cannot be allowed to fail. The central banks could have seen that as soon as they help a little, the market wants to join the effort,? said Miguel Paz from Unicorp. ?At any time there ought to be a response from Europe,? said José Carlos Díez, a chief economist from Intermoney.
