Bond yields are spiking across Europe, not to mention the spreads between Belgian, French, Spanish, and Italian bonds and German 10-year bunds.To give you an idea, here’s today’s carnage in 10-year spreads (via Bloomberg):
But there’s a simple reason behind this, other than simple market fear: the European Central Bank is drastically cutting its purchases of Italian and Spanish bonds on the secondary market, according to Spanish newspaper Cinco Dias (in Spanish).
The ECB cut these purchases by more than half last week—from €9.50 billion ($12.90 billion) the week before to just €4.48 ($6.08 billion) billion.
The bank is reportedly engaging in a drastic liquidity drain today in order to stem the effects of inflation in the markets that has been caused by that bond buying.
New ECB president Mario Draghi—who took office November 1—emphasised that the Securities Market Program (through which the bank can purchase sovereign bonds on the secondary market) was always a temporary program.
Investors have hoped that Draghi would take more aggressive action to stem rising bond yields across the eurozone. This liquidity draining operation suggests that he might not be keen to deliver on this hope.