Bond market developments in the Euro-area have been a little more encouraging since early August, with the exception of Greece. This is despite the fact that the Merkel-Sarkozy "summit" a week ago was not especially reassuring.
Instead, the improvement probably reflects the ECB’s more aggressive intervention in the Euro-area bond market over the past two weeks. Last week the ECB bought €14.29bn of Euro-area government bonds (probably mostly Italian and Spanish bonds). This follows bond purchases of €22.0bn the previous week.
In total, the ECB has purchased €110.5bn of Euro-area government bonds (controversially), with the purchases in the past two weeks coming after 19 weeks of not buying any bonds. Clearly, the renewed buying was in response to Italian and Spanish bond yields moving sharply higher, to over 6% in late July and early August.
Although Greek bond yields remain exceptionally high (Greece 2-year bond yield is currently at 37.3%, 10-year at 17.3%), Portuguese, Irish, Spanish, and most significantly, Italian bond yields have all fallen noticeably in the past few weeks. The Irish 2-year bond yield has declined from 24.9% on 18 July to 9.6% currently, while the Italian 10-year bond yield is down at 5.0%, compared with 6.24% on 4 August.
The improvement in Euro-area bond yields have helped to calm financial market conditions generally. However, the economic environment in the Euro-area remains extremely fragile, with no clear long-term financial/economic/political solution in place for the 17 member states.
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