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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 in 2016 in favor of EU, rejecting Marine Le Pen’s bid, the Italian election this year was 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 the Eurozone. Secondly, despite the win by Emmanuel Macron in the French election, which many called as the end of populism in Europe, the political risk has not diminished completely. The latest Italian election is a proof of that. The turmoil with Catalonia also proves to be a good example of the risks associated. Same can be said for Sweden, where the right-wing populist government is set to sweep the upcoming election.
|
|
2-year spread over Germany (bps) |
10-year spread over Germany (bps) |
Change in spread(10-yr) since 6th July 2018 |
|
Austria |
10.5 |
21.6 |
-4.5 |
|
Belgium |
11.6 |
36.5 |
-1.4 |
|
Finland |
7.4 |
19.4 |
-3.1 |
|
France |
9.5 |
34.6 |
+0.1 |
|
Germany |
- |
- |
|
|
Greece |
206.2 |
388.2 |
+15.2 |
|
Ireland |
14.9 |
52.6 |
+2.6 |
|
Italy |
170.2 |
269.2 |
+30.1 |
|
Malta |
- |
106.9 |
+1.7 |
|
Netherlands |
1.3 |
11.3 |
-3.8 |
|
Portugal |
43.7 |
144.3 |
-5.9 |
|
Slovenia |
46.1 |
59.4 |
-4.2 |
|
Spain |
28.1 |
104.7 |
+3.1 |
|
|
|
|
|
Analysis:
Since our last review back on 6th July 2018, the German 2-year yield has tightened somewhat. It is currently at -0.62 percent (+0.6 bps). The 10-year yield has also moved higher, which is currently at +0.331 percent (+0.035 bps).
The spreads (10 yr.) have narrowed only in Austria, Belgium, Finland, Netherlands, Portugal, and Slovenia and moved higher for the rest. Italy saw the biggest widening (+30.1 bps) thanks to the standoff over the budget between Italy and Brussels after the last election, followed by Greece (+15.2 bps).
The bond market is showing signs of stress in the Eurozone bond market as Italian yields move sharply higher. However, the yields are broadly down. The upward march in Italy’s yields is still not overly concerning and might move down fast once the policy outlook of the new Italian government clears up.
