Eurozone sovereign bond spreads: latest updates
Source: FxWire Pro - Commentary / 07 Nov 2017 07:12:50 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.
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 the 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.
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 in the French election, which many called as the end of populism in Europe, the political risk has not diminished completely. The recent turmoil in Catalonia proves to be an example of the risks associated.
2-year spread over Germany (bps)
10-year spread over Germany (bps)
Change in spread(10-yr) since Oct. 2nd
Since our last review back on 2nd October, the German 2-year yield has declined slightly. It is currently at -0.758 percent (-0.02 bps). The 10-year yield has also moved lower, which is currently at +0.336 percent (-0.004 bps).
However, one can see that while German yield has barely moved despite the European Central Bank (ECB) extending its asset purchase program, the yields of other economies in the Eurozone have declined significantly.
Spreads have narrowed in the case of Austria, Belgium, Finland, Greece, Ireland, Italy, Malta, Portugal, Netherlands, Spain, and Slovenia.
Biggest narrowing happened in Greece and in Italy, largely due to the improving economy.
It is important to note that Catalan independence referendum hasn’t affected the bond spread much for Spain.
10-year yields are showing signs of no major upward movements despite a pickup in inflation.© FxWire Pro 2018. 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.