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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 on 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 this year in favour of EU rejecting Marine Le Pen’s bid, the Italian election next year is expected to be dominated by euro-sceptics. 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 surround ding 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 the political risk has not diminished completely.
|
|
2-year spread over Germany (bps) |
10-year spread over Germany (bps) |
Change (10-yr) since Sep. 12th |
|
Austria |
11.2 |
17.2 |
-4.1 |
|
Belgium |
15.5 |
27.8 |
-3.3 |
|
Finland |
4.1 |
16.4 |
+18 |
|
France |
10.5 |
29.6 |
-0.4 |
|
Germany |
- |
- |
|
|
Greece |
379.4 |
516.6 |
+1.9 |
|
Ireland |
19.3 |
29.9 |
-6.9 |
|
Italy |
55.8 |
176.6 |
+7.1 |
|
Malta |
- |
101.1 |
+1.7 |
|
Netherlands |
0.2 |
11.9 |
-0.6 |
|
Portugal |
69.4 |
196.8 |
-53.8 |
|
Slovenia |
52.7 |
55.1 |
-8.9 |
|
Spain |
39.7 |
124.3 |
+0.6 |
|
|
|
|
|
Analysis:
Since our last review back on 12th September, the German 2-year yield has risen slightly. It is currently at -0.738 percent (-0.022). However, the 10-year yield has also moved lower, which is currently at +0.34 percent (-0.066).
There have been few major changes in the sovereign spreads. Spreads have narrowed in the case of Austria, Belgium, France, Ireland, Netherlands, Portugal, and Slovenia.
Biggest narrowing happened in Portugal (-53.8), largely due to the improving economy and win by socialist candidates in local elections.
It is important to note that Catalan independence referendum hasn’t affected the bond spread much.
10-year yields are showing signs of upward movements as inflation remains high.
