Fragmentation in the European Government Bond Market: The Risk of Mis-Pricing

Since the sovereign debt crisis, the Eurozone has suffered from the problem of high fragmentation of the sovereign debt market, with the effect of a widening of spreads not always justified by fundamentals, but rather often amplified by fluctuations in market sentiment. 

To address this problem, the ECB launched several programs, including the Transmission Protection Facility. 

The TPI is de facto a commitment of the ECB to intervene in markets to curb yields that are not justified by the fundamentals or countries’ fiscal profligacy. 

A weakness of the TPI as a policy instrument is its lack of precision in determining which yields are justified and which are not. These risks create arbitrariness and difficulties in providing markets with forward guidance. 

IEP@BU fellow Carlo Favero presents a tool he developed with his co-authors Massimo Amato and Dev Srivastava, to measure sovereign bond “mispricing”.  

 Maria Cannata has supervised for two decades, including the 2011-2012 euro crisis, and the Italian public debt emissions. As a leading expert in sovereign bond markets, she will discuss Carlo Favero’s findings and policy implications.  

Maria Cannata is the chairwoman of Mts, a leading trading exchange for sovereign bonds. She is also a consultant to the Italian Ministry of the Economy and Finance, where she led the Treasury Department from 2000 to 2018.  

Carlo Favero is a full professor of Economics at Bocconi University. He has also worked as an advisor to the Italian Ministry of Treasury for constructing an econometric model of the Italian economy, and as a consultant to the European Commission, the World Bank, and the European Central Bank, on monetary policy and the monetary transmission mechanism and bond markets. 

Stefano Feltri, IEP@Bu communication advisor, will moderate the event.