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We at FxWirePro decided to add a simple but very important tool to our regular watch list and that is sovereign bond spreads of Eurozone economies over Germany. It was included in the watch list during the Eurozone debt crisis and we believe that the current situation once again demands regular monitoring.
Why monitor?
Currently, there are 19 economies in the European Monetary Union (EMU) and all of them use the single currency euro. However, not all economies are at the same stage of growth and development. Even the political situation is not the same. For example, while Germany enjoys record low employment, the unemployment rate in Greece is sky-high. While French has voted last year in favor of EU rejecting Marine Le Pen’s bid, the Italian election this year is expected to be dominated by euro-skeptics. Single currency does not reflect these sentiments fully as it is a sum of all and when it does it would be sometimes too late to enter a good trade.
Why now?
Despite the ongoing rally and positive sentiment surrounding the euro, there are two major underlying risks. There is a risk that monetary policy reversal by the European Central Bank (ECB) might once again expose the fragmentation within Eurozone. Secondly, despite the win by Emmanuel Macron in the French election, which many called the end of populism in Europe, the political risk has not diminished completely. The recent turmoil with Catalonia proves to be an example of the risks associated.
|
|
2-year spread over Germany (bps) |
10-year spread over Germany (bps) |
Change in spread(10-yr) since Nov. 7th |
|
Austria |
4.7 |
9.7 |
-1.7 |
|
Belgium |
6.3 |
13.9 |
-4.9 |
|
Finland |
-2.4 |
10.9 |
-4.8 |
|
France |
16.2 |
29.2 |
-9.1 |
|
Germany |
- |
- |
|
|
Greece |
187.4 |
303 |
-176 |
|
Ireland |
24 |
43.5 |
+21.2 |
|
Italy |
29.9 |
132.7 |
-6.4 |
|
Malta |
- |
71.7 |
-22.3 |
|
Netherlands |
-5.2 |
4.5 |
-6.1 |
|
Portugal |
54.2 |
125.2 |
-40.5 |
|
Slovenia |
37 |
46 |
-3.6 |
|
Spain |
30.6 |
74.7 |
--34.7 |
|
|
|
|
|
Analysis:
Since our last review back on 7th November, the German 2-year yield has risen considerably. It is currently at -0.53 percent (+33 bps). The 10-year yield has also moved higher, which is currently at +0.706 percent (+37 bps).
However, one can see that as the German yield has barely moved despite the European Central Bank (ECB) extending its asset purchase program, the yields of other economies have moved along.
Spreads have narrowed in the case of Austria, Belgium, Finland, France, Greece, Italy, Malta, Portugal, Netherlands, Spain, and Slovenia.
Biggest narrowing happened in Greece and in Portugal, largely due to the improving economy.
It is important to note that Catalan turmoil hasn’t affected the bond spread much for Spain. The 10-year spread has narrowed by 34.7 bps against Germany.
