INSIDE THE ECB’S BOND STRATEGY

Q.WHAT DOES THE ECB HOPE TO ACHIEVE?

A.By purchasing Italian and Spanish bonds, the European Central Bank is aiming to stop further contagion across debt-burdened sections of the Eurozone.

Q.HAVE ANY PURCHASES BEEN MADE SO FAR?

A.While the ECB is thought to have entered the market yesterday, after an 18 week hiatus, details of its purchases will not be revealed until next week.

Q.HAS IT WORKED?

A.Yields fell off a cliff yesterday, with both Spanish and Italian yields shedding around one per cent each -- a notably positive sign for the Eurozone. Spanish yields went as low at 5.13 per cent, with Italian yields touching 5.26 per cent. “The move has been massive,” said Darren Ruane of Investec Wealth and Investment, “yet my view is this is all on sentiment, rather than people seeing physical purchases.”

Q.SO THEY’VE REASSURED THE MARKETS?

A.No, not all the markets. Despite yields easing, equity traders paid little attention. The Stoxx Europe 600 closed at its lowest level since August 2009, last night. While bond purchases may work as a short term assurance, the crisis requires longer term measures that traders may not have faith in politicians delivering.

Q.HOW MUCH DO THEY NEED TO BUY?

A.RBS analysts expect the ECB to purchase around €2.5bn a day, €600bn if maintained over time.

Q.WILL IT BE MAINTAINED OVER TIME?

A.No, not by the ECB. The purchases are a reluctant bid to ward off crisis until the European Financial Stability Facility (EFSF) steps in to purchase the bonds of weak member states on the secondary market. Yet this requires parliamentary approval by member states, which may not come until the end of September.