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The ECB’s Toxic Bond-Purchase Program

It is unclear why the European Central Bank has introduced a new asset-purchase instrument instead of using its existing Outright Monetary Transactions facility. By shielding countries from both market forces and political commitments, the Transmission Protection Instrument risks destabilizing European monetary union.

BERLIN – With eurozone inflation rising rapidly, the European Central Bank recently increased its benchmark interest rate by 50 basis points and introduced a new asset-purchase program – the Transmission Protection Instrument (TPI) – aimed at limiting yield differentials between member states’ bonds. But the ECB’s latest anti-fragmentation tool risks destabilizing the single currency.

Market interest rates in the eurozone, including those on government bonds, have risen sharply since the end of 2021, because investors want to be compensated for higher inflation and have already priced in monetary-policy tightening. Alongside higher yields, interest-rate differentials within the eurozone also have increased, with interest rates rising more sharply in countries with higher public-debt-to-GDP ratios and deteriorating growth prospects.

For example, while yields on ten-year German government bonds climbed from -0.33% to 1.75% between the beginning of December 2021 and mid-June 2022, yields on ten-year Italian bonds increased from 1.02% to 4.27% over the same period. The yield differential thus increased by 1.17 percentage points.

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