• Euro zone sovereign bond spreads: a must watch tool

    Source: FxWire Pro - Commentary / 22 Aug 2017 08:01:08   Eastern Standard Time

    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 favor of EU rejecting Marine Le Pen’s bid, the Italian election next 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 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)

    Austria

    13.1

    18.9

    Belgium

    15.8

    31.7

    Finland

    3.2

    1.3

    France

    16.6

    30.7

    Germany

    -

    -

    Greece

    392.7

    518.9

    Ireland

    23

    33.8

    Italy

    65.4

    169.5

    Latvia

    76.6

    14.4

    Malta

    -

    92.9

    Netherlands

    7.1

    13.3

    Portugal

    76.9

    236.1

    Slovakia

    42

    -39.6

    Slovenia

    59.3

    61.9

    Spain

    35.8

    105.8

    Currently, this tool just shows the spread but soon, other information like changes would be included too, in order to have a feel of what is happening. German 2-year yield is currently at -0.716 percent and the 10-year yield is at +0.406 percent.