ECB has the flexibility of selectively intervening in the primary market to buy the Sovereign debt issuances where credit spreads have widened against the Bunds yields curve. It’d be entirely reasonable to balance yield curve spreads. i.e. allowing the Bund yield curve to rise, while keeping a cap on other Euro Area Yield curves and credit spreads, in particular when these countries have reduced Fiscal space and less pricing power in open markets. On a second derivative effect, it’d be possible to argue that, negative interest rates in the Euro Area have determined the large imbalances in Target2 within Euro Area NCBs. Negative Yield curves and large surpluses of Germany, the balance of trade and fiscal, then have become the Fiscal transfer mechanism toward other Euro Area countries, allowing the Bund yield curve to rise while the ECB decides where to set the Euribor, would potentially produce two things: Higher private savings in Germany, while the German Government will have some Fiscal deficits.
Larger Fiscal deficits and a higher Bund yield curve can produce a balancing of flows in the Target2 NCBs system. In the past decade, the negative Bund Yield curve determined Germany’s Fiscal surplus. This surplus was generated by the Fiscal deficit of all other Euro Area countries, that have always accessed primary and secondary Sovereign debt markets with low but positive yields, at least on the long duration of the curve. The Target2 imbalance derives from the fact that Germany’s Fiscal surplus then has to be transferred in terms of flows within Target2 allowing the Bund yield curve to rise by narrowing the credit spread differential, with other Euro Area yield curves, which would then see the German Government making less Fiscal surplus by paying positive Yielding coupons on Bunds, which will allow rebalancing in the Target2 flows.