bonds

The danger of big bazookas

There’s a scene in the film ‘Four Lions’ where one of the characters picks up a hand-held surface-to- air missile, aims it at a plane and fires. Only then did he realise he was holding it the wrong way round and that the missile went shooting off behind him. The current talk of the ECB’s big bazooka reminds me of this scene, because even if the ECB were able to find and fire this weapon, there’s a good chance that it could have similar unintended consequences.

17/11/11 @ 13:07 GMT by Simon Smith, Chief Economist

Basic basis stress

One of the standout themes of this week has been the growing strain evident in euro funding markets. During the depths of the credit crisis it was the Libor-OIS spread that was often used to measure the extent of this, in other words the different between having to take on overnight credit risk and 3mth credit risk (will the bank be around in three months?). But 2008 was also the time when cross-currency basis swaps ballooned out as well.
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17/11/2011 @ 10:45 GMT

An eerie calm

After Tuesday’s horror show, Europe’s markets were eerily calm yesterday, but frankly it seemed nothing more than an uneasy quiet before the next thunder-cloud arrives. Talk of the ECB stepping up the pace of secondary market purchases helped steady frayed nerves, but even so it is a long way short of the buying power that is required to soak up the forced sellers.
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17/11/2011 @ 08:26 GMT

Far from normal in eurozone bonds

After yesterday’s bond market carnage, the ECB is reportedly fighting back this morning. Italian yields have fallen 20bp and are now back below 7%. The talk is that the ECB has been buying bonds in size (some reports around EUR 1bln) and if true, this would represent a modest stepping up from the pace seen last week, with total purchases amounting to just under EUR 5bln. Behind this, there are two other factors going on. As yesterday showed, investors are becoming forced sellers of bonds, partly to satisfy capital adequacy rules.
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16/11/2011 @ 10:28 GMT

Terrible Tuesday

The air of calm that pervaded the start of the week lasted barely for a few hours. By yesterday, it had morphed into a full scale rout in European bonds that saw spreads to Germany widen out once again. Banks are taking any opportunity to sell and the decline in liquidity as year-end approaches will only serves to make matter worse and prices more volatile. The distance between the ‘haves’ and ‘have-nots’ is growing ever greater.
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16/11/2011 @ 08:15 GMT

The contagion unleashed by the EBA’s capital adequacy regime

Bullied by global investors into implementing stricter capital adequacy requirements, the European Banking Authority has (predictably) contributed to the contagion that is afflicting Europe’s bond markets. Unable and unwilling to raise fresh capital to meet the new targets, the vast majority of Europe’s banks are employing other tactics such as retaining earnings or freezing dividends.

15/11/11 @ 13:45 GMT by Michael Derks, Chief Strategist

The task ahead for Monti

There’s a strange calm in markets this Monday. The two previous Mondays have been characterised by crisis. Two weeks ago it was the Greek proposal to have a referendum on the latest bailout package and we all know where that ended up. Last week it was the impending fall of the Italian government and related monumental rise in bond yields. Much has been made of the Italian bond auctions this morning, but these were for below-average amounts and were five year paper, so should not seen as a huge test of international investor confidence.
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14/11/2011 @ 11:48 GMT

The window of hope for Italy

The crux of the matter in Italy is the degree to which this is a fiscal or political crisis. The question is valid because the fiscal and economic backdrop is different and in many ways not as extreme as for the recently bailed-out nations. At the same time, the politics of Italy is more fractured than for pretty much any other eurozone nation.

10/11/11 @ 13:41 GMT by Simon Smith, Chief Economist

Italy’s disappearing chances

On paper at least, Italy moved beyond the point of no return on Wednesday. Yields above 7% would require Italy to run consistently high primary budget surpluses (ex. interest rate payments) of 3% to 4% of GDP just to stabilise interest rate costs and prevent them ballooning out of control. Since the start of EMU, Italy’s primary surplus has averaged just under 2%. The passing of the budget bill will not bring in the austerity that will overcome the rise in yields. What markets have to decide is whether this is primarily an economic or political crisis in Italy.
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10/11/2011 @ 08:11 GMT

France forced to announce further austerity

Amidst clear signs that the economy is slowing and with the country’s credit rating under serious threat, French finance minister Fillon will announce further austerity measures today. President Sarkozy already committed last week that the budget needed to be reduced by at least EUR 6bn in order to ensure that the deficit remained consistent with the pledge to attain a balanced budget by 2016. Fillon delivered a EUR 12bn fiscal consolidation package just three months ago.
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07/11/2011 @ 09:44 GMT