It’s Not Just Spreads ECB Chief Lagarde Needs to Tackle

The yield on Italian 10-year government debt has climbed by about 3 percentage points since the beginning of 2021: Of that, about 2.5 percentage points reflects higher expected policy rates over the coming decade, and only about 0.5 percentage points indicates a widening of the spread between Italian borrowing costs and risk-free rates. If the European Central Bank wants to put the Italian yield problem to bed, it should look beyond fragmentation and take steps to deal with surging -- and potentially unwarranted -- policy-rate expectations. Bloomberg Economics anticipates President Christine Lagarde and her colleagues on the Governing Council will push back on market pricing and ultimately disappoint expectations for rates in the euro zone to climb above 2%.

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