The European Central Bank (ECB) headquarters in Frankfurt, Germany, on Monday, May 23, 2022. 
ECB President Christine Lagarde underscored officials’ determination to stop so-called fragmentation within the euro-area on Thursday as she spelled out plans for a series of hikes starting in July, sentiment that Banque de France Governor Francois Villeroy De Galhau reiterated on Friday.
But they fell short of elaborating on any new tool -- such as another bond-buying program -- which some investors and analysts see as necessary to keep financial conditions from tightening disproportionately in more-indebted Mediterranean economies as the ECB begins to raise interest rates over the coming months.
“Such a vague approach towards creating a backstop on spreads means that the European government bond market must first shift into crisis mode and unwarranted spread widening before the ECB acts,” wrote Jorge Garayo, rates strategist at Societe Generale SA.
The yield on 10-year Italian bonds rose 13 basis points to 2.73%, headed for their highest close since 2014. The rout also spread to Greek debt, which is considered to be even more sensitive to ECB policy. The benchmark 10-year yield surged as much as 29 basis points to 4.41%, the highest since January 2019.
While so far the moves have been “orderly,” according to ING Groep NV strategists including Antoine Bouvet, it’s unclear how long this will continue if ECB policy makers fail to take further action.
For some strategists, there’s a risk that more indebted nations could be put under so much pressure by increased borrowing costs it will force the ECB to stop hiking altogether.
“It doesn’t make much sense for the ECB to raise rates aggressively, cause fragmentation, then introduce a new tool to counter it,” wrote Citigroup Inc. strategists including Jamie Searle in a note to clients. “More likely is that if fast, initial hikes add to sharp BTP widening, this knocks out the hiking cycle,” he said, referring to Italian bonds.