The last thing the ECB wants to do is invoke a taper tantrum on scale the US experienced in 2013 when 10 year Treasury yields doubled to reach 3%. And after 10 year Bund yields also doubled to more than 0.50% earlier this month ECB president, Mario Draghi, was about as dovish as he could have been when the council met last week.
But crucially, with inflation progressing towards the central bank’s 2% medium term target, the ECB is on course to announce a tapering of its asset purchase programmes later this year. A lower pace of balance sheet expansion should take place next year.
After so many years of spread compression, the ECB supertanker needs miles of space and time to change course. Draghi will be ready to signal an increase in QE should anything go awry too. But beyond that, credit spread differentiation is back in play.
As risks become correlated to rewards, spreads should open up across the capital stack and interest rate curves will steepen. And as price distortion is replaced by price distinction, the difference between Europe’s lower and higher rated sovereign entities should become more visible.
The fact spreads have been contained so far is surely a reflection of a robust recovery in parts of Europe's periphery. Yet with their mountains of public debt and precarious political backdrops, Italy and Greece will surely remain the focal point of market anxiety and be the fulcrum around which ECB policy is determined.