Identifying excessive spread dispersion in the euro area: When do sovereign spreads go beyond fundamentals?

We present a metric for excessive spread developments in the Economic and Monetary Union (EMU), based on the dispersion of sovereign spreads relative to macro-financial fundamentals. To allow for time variation in this relationship and isolate the impact of fundamentals, we present rolling regressions that control for the role of market sentiment. The metric shows that the observed dispersion of spreads occasionally overshot the fundamentals-based benchmark for short episodes. Especially during the European debt crisis and the COVID crisis, these periods coincided with interventions by the European Central Bank to stabilize markets. We conclude that those interventions were effective to counteract excessive dispersion of sovereign spreads among EMU countries.