On June 15, it conducted a “ad hoc” meeting to discuss “euro area fragmentation.”
“Fragmentation” indicates the economy and government bond yields are considerably divergent.
The ad hoc gathering followed Isabel Schnabel’s key speech:
To strengthen the structure of euro area institutions, governments must conclude the Banking and Capital Markets Union, build a permanent fiscal tool that makes risk sharing simpler, and create a safe asset that doesn’t create bad incentives.
This type of safe (or “anti-fragmentation”) equipment is still being made, according to the ad-hoc meeting. The ECB may put maturing bonds into a main portfolio.
Watch the red lights.
The ECB seems slow despite flashing red caution lights.
Concerning the signs we discussed in March:
Euros now cost $1.0505. This indicates a shaky eurozone economy or other issues.
The benchmark 10-year German bund yield has risen from 0.50 to 1.70 percent. This raises inflation fears in the eurozone.
Austrian government bonds due in 2117 are cheaper. So yet, there isn’t much discourse about the risks of long-term bonds with growing inflation.
End of March, there was a 150-basis-point disparity between 10-year Italian and German bond yields. 252 basis points separate them. Spreads are widening, which increases the risk of “fragmentation”
Germany loans are dangerous.
The 10-year German Bund yield, a euro area bond benchmark, has risen.
Yield: 0.483% The yield went negative in April 2019 due to ECB QE. February’s yield was 0%.
Germany gets money from the 10-year Bund. This bond matures on 15 February 2032 and pays 0% interest.
In nine weeks, this bond’s yield rose 0.50 percent. Bond prices and investments will decline 5 percent.
Investors aren’t evenly affected by bond yield increases. Bond duration is discussed. Bond price sensitivity to yield movements. Longer-term bond yield changes are larger. The benchmark German Bund has no coupon payments, thus it’s ten years.
But…
A century?
Risky Austrian loans
My colleague Charlie Morris looked at Austria’s 2.1% bond in The Fleet Street Letter Wealth Builder, another Southbank Investment Research publication.
2017 had low eurobond yields. Austria capitalised.
A 2117 bond reduced the government’s balance sheet risk.
Austria issued a wise bond.
Investors should buy and/or hold the bond until 4Q2020.
Mid-2017 €100 bonds rose to €230 by 2020.
€121 off in 15 months. Peak investors lost 47%.
€188 in 2021. The bond’s value is down 33%.
The relationship is safe. Bond analysts and rating agencies think Austria will pay all interest and refund the $100 principal when the bond expires in late 2117. Forex:
Austria is AA+ with a positive outlook. Austria has a stable Aa1 Moody’s rating. Austria has a stable outlook from Fitch. Austria’s AAA rating is stable.
All eurozone governments aren’t respected.
Austria, Germany, France, the Netherlands, Finland, and others are in the eurozone’s “core.” Balanced budgets, high savings rates, well-capitalized banks, low inflation, and strong currencies define “core” countries (before EMU in the 1990s).
“Peripheral” euro area countries have excessive inflation, overextended banks, budget deficits, or current-account deficits.
Ireland, Greece, Portugal, and Spain are “peripheral” The economic and financial crisis in the eurozone culminated on July 26, 2012, when ECB head Mario Draghi swore to “defend the euro.”
Predicting Greece’s losses
“Peripheral” countries are riskier than “core” countries, hence their bonds are more expensive.
Spread is government 10-year bond yield minus German Bund yield.
If the spread grows, analysts and investors fear a default (when a government stops paying interest and/or principal).
Spread narrowing reduces perceived risk.
10-year Greek bond spread. Before Draghi’s famous May 2012 remark, the spread was 2,795.
Investors demanded a 28% premium above the return on German Bunds to finance the Greek government.
Greece’s image and reality improved. Spread was 1,396 bps in June 2015. 116 bps by April 2015.
239bps spread. In less than a year, Greek government bond investors’ risk premium rose 1%.
Exponential Investor found several “red lights” in the US bond markets, or warning signs for the economy and financial markets.
Eurozone bond markets have fewer “red lights” now. The amber lights could flash anytime.
EURO One euro cost $1.2255. Now $1=€1.099. Euro fell 10% against the dollar. Further euro depreciation could signify European problems.
Bund yield. Yield changes show eurozone inflation predictions. Inflation raises bond yields and lowers bond prices.
Bond analysis. The last two years haven’t been kind to Austrian 2.10 percent bond holders. This isn’t covered much in mainstream or financial media. If euro zone bond yields rise, long-term bonds may lose value.
Greece, Italy, and Spain bond spreads. Widening spreads may signify economic trouble.
