Federal Reserve Bank of Atlanta notes in a report released yesterday (May 12) that the European bond spreads (over German bonds) narrowed considerably this week following EU’s €750 billion ($1 trillion) emergency package intended to stabilize the euro and contain the bloc’s spreading government debt crisis. According to the report, LIBOR to OIS spreads rose sharply, particularly between May 6 and 7, as European debt crisis increased interbank premiums.
In addition to the $1 trillion package, the European Central Bank announced its Securities Market Program, will buy government and private debt to keep debt markets functioning and lower borrowing costs.
“During the past few weeks, the 10-year Greece-to-German bond spread had risen to nearly 10% (or 1000 bps), but following the €750 billion EU/IMF package, the spread fell sharply to around 450 bps, as of May 11. Other European peripherals’ spreads also narrowed, with Portugal currently at 152 bps, Ireland at 165 bps, and Spain at 100 bps” – Atlanta Fed