Eurozone sovereign bond spreads- latest updates
Source: FxWire Pro - Commentary / 25 May 2018 08:02:39 Europe/London
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.
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.
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
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.© FxWire Pro 2019. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.