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From the BlackRock blog, May 12:
Elga explains why a ruling by the German constitutional court has led us to review our stance on euro area peripheral bonds.
The German constitutional court last week made a surprise decision on the bond purchase program by the European Central Bank (ECB). The ruling could potentially undermine the ECB’s independence – and threaten to fuel fragmentation within the euro area in the long run. This comes as the ECB’s actions to cushion the pandemic’s fallout already looked meek compared with the Federal Reserve’s. As a result, we are reviewing our overweight on euro area peripherals, or government bonds from southern-tier nations.
The German court gave the ECB three months to justify its 2-trillion-euro bond purchase program to the German parliament. Otherwise the Bundesbank – the ECB’s largest shareholder and bond buyer – would have to pull out of the program, the court said. The ruling put a spanner into the works of the ECB’s “whatever-it-takes” commitment – at a time when effective execution of policies is critical to safeguard the economy against damages from the coronavirus shock. As evidence of the vulnerability in the euro area’s hardest-hit economies, the yield spread between Italy’s government bonds and their German counterparts has been widening since late March despite the ECB’s stepped-up purchase program. In contrast, the spread between U.S. investment grade and U.S. Treasuries has narrowed from its peak in March – and has steadied since mid-April as the Fed’s pandemic response allayed credit concerns. See the chart above........MORE
