Heard on the Street
ECB Bond-Buying Brings Another Market Mystery
How and why QE works remains a subject of much debate
By Richard Barley
March 30, 2015 10:35 a.m. ET
If there is one thing that quantitative easing reliably generates, it is questions about how it works.
The European Central Bank’s bond-purchase program is no exception. But, this being the eurozone, the puzzles are proving different from elsewhere.
Even the reaction of the government-bond market has proved perplexing. ECB bond purchases were expected to lead to narrower yield gaps between Germany and southern European nations, such as Italy and Spain. But German 10-year yields have fallen while those of Italy and Spain are little changed from March 6, the last trading day before the ECB began buying bonds. In Spain’s case, the yield gap has even widened slightly versus the start of the year.
One theory is that this is because of nerves around Greece, where the government is continuing to labor on economic reform proposals but has yet to develop a plan that satisfies the rest of the eurozone. But set against that is the relatively strong showing put in by Portugal, which might have been expected to be vulnerable to Greek contagion. Portuguese 10-year bonds now yield just 0.45 percentage point more than their Italian equivalents, down from close to 0.9 point at the start of the year.
True, Portugal has had some good news of late: Standard & Poor’s lifted its rating outlook to positive this month, and Fitch maintained its positive outlook last Friday even as it cut Greece’s rating. But while Portugal has made economic progress, it still carries “junk” ratings and has more to do to mend its public finances.
At least the eurozone is being spared the debate that plagued the U.K. in particular during its quantitative-easing program about why the economy was flatlining. The eurozone is rebounding and may well be outpacing the U.S. in the first quarter, a development few had forecast. Of course, QE can’t take the credit for that. The eurozone recovery was already getting under way late last year, with lower oil prices one of the biggest contributing factors.
But that deepens the puzzle of why Spain and Italy are lagging Germany in the bond market. A better growth outlook should be more beneficial for highly-indebted countries whose bonds are perceived to contain credit risk than safe-haven nations like Germany. That suggests that it is perhaps technical factors that are to blame—both Italy and Spain have been issuing long-dated debt that may be weighing on the market—with economic fundamentals counting for little.
The familiar problem with QE is that no one knows what the market would be doing if the ECB were not buying bonds. Perhaps Greece might then be looming larger as a threat, and the yield gap between Germany and southern Europe might be yawning wider. The argument elsewhere is that QE staved off worse outcomes: if it is preventing a resurgence of the eurozone debt crisis, then that is equally true for the eurozone.
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