Capital markets bankers and their sales and trading colleagues marvelled on Tuesday morning at how the spread between Italian government bonds and their German counterparts narrowed, on the potential for a new, jumbo bond programme by the European Union to finance its response to the Russian invasion of Ukraine.
The gap between BTPs and Bunds tightened by 13bp as it emerged EU leaders were discussing plans that could involve issuing up to €100bn this year to finance defence and renewable energy, as the bloc strives to wean itself off its dangerous dependence on Russia for energy supplies.
Some were surprised at the tightening, believing the threat Russia presents (on top of the still likely withdrawal of quantitative easing) should be driving European periphery spreads wider instead of tighter, especially those of Italy, a particularly big consumer of Russian gas.
But the market appeared to welcome a plan that looked like lessening Italy's exposure, or at least helping it with the burden. The REPowerEU programme, on which more details were announced later in the day, is meant to ultimately free the EU from this problem.
Investors, in fact, may be perceiving just what REPowerEU and the defence plans represent — another important step towards a United States of Europe, in the same way that the responses to the sovereign debt crisis 10 years ago and the pandemic more recently brought about more political and economic cohesion than would have been possible without financial and social emergencies.
It is countries in the periphery that stand to gain most from these transformational moments that, history shows us, end up bringing about greater political and economic cohesion. Spain's bonds tightened by 8bp against the Bund, showing it was not just about Italy.
The speed of action has also impressed — a result, perhaps, of EU leaders now being well practised at dealing quickly with threats, including having the financial tools and levers in place to press into action (SURE, Next Generation EU, macro financial assistance, quantitative easing etc).
There is of course a double irony here. We are one step closer to a United States of Europe thanks to the man in the east trying to rip it apart.
And despite the weakening of Europe by the UK's exit, a combined EU defence force now appears a lot easier to create and implement.