• Eurozone sovereign bond spreads- latest updates

    Source: FxWire Pro - Commentary / 25 May 2018 03:02:39   America/New_York

    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 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 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 recent turmoil with Catalonia also proves to be a good example of the risks associated.

     

    2-year spread over Germany (bps)

    10-year spread over Germany (bps)

    Change in spread(10-yr) since 11th May 2018   

    Austria

    12

    29.8

    +9.4

    Belgium

    15

    35.2

    +8.5

    Finland

    8.3

    14.7

    +3.8

    France

    7.5

    21.4

    -1.9

    Germany

    -

    -

     

    Greece

    207.2

    379.9

    +32.2

    Ireland

    14.2

    50.7

    +10.6

    Italy

    94.3

    196.8

    +65.3

    Malta

    -

    90.6

    +20.6

    Netherlands

    -0.3

    17

    +2.7

    Portugal

    59.7

    146.4

    +34.7

    Slovenia

    27.6

    67

    +16.1

    Spain

    39.1

    94.6

    +21.3

     

     

     

     

     

    Analysis:

    Since our last review back on 11th May 2018, the German 2-year yield has softened somewhat. It is currently at -0.63 percent (-0.6 bps). The 10-year yield has also moved lower, which is currently at +0.466 percent (-0.089bps).

    The spread (10 yr.) has narrowed only in France and moved higher for the rest. Italy saw the biggest widening (+65.3 bps) thanks to political uncertainties after the last election, followed by Portugal (+34.7 bps), Greece (+32.2 bps), and Spain (+21.3 bps).

    The bond market is showing signs of contagion in the Eurozone bond market as Italian yields move sharply higher, which pushed yields higher across the board. However, the upward march is still not overly concerning and might move down fast once the policy outlook of the new Italian government clears up.

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