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The European Central Bank has held sovereign debt yields low through bond purchases, and recently increased buying in its 1.85 trillion-euro ($2.22 trillion) emergency stimulus scheme, known as PEPP. And it is no longer battling alone to support the euro economy, as the pandemic induced governments to spend more and to create an 800 billion-euro Recovery Fund, seeded by joint European Union borrowing.

However, the recovery fund roadblocks as Germany’s top court have halted the fund's ratification. It is most concerning for poorer southern European countries, which stand to benefit the most from disbursements. Their borrowing costs fell last year as the Recovery Fund deal was seen reducing risks for their economies, but yields have started to edge up on concerns that support for these economies may not come soon enough.

The ECB bought a net 17.1 billion euros under its PEPP last week, versus 10.6 billion euros the previous week. But it agreed at its March meeting to front-load buying, on condition it would cut purchases later if conditions allowed. Investor demand for 50-year bonds issued recently by Italy and Austria was strong, implying confidence in ECB support. But Spanish and Portuguese 10-year yields have risen 15 bps each since ratification of the fund was halted. Italian 10-year yields are near a six-week high and their premium over Germany is near the widest since early March. Southern European 10-year yields of 0.4% to 0.8% offer little compensation for risk, it was hard to go against the ECB backstop.

ECB’s resolve to pin down the bloc’s borrowing costs, precisely at a time when higher U.S. Treasury yields (1.6%) are tempting investors away from European markets.

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