Italian / Greek bonds as safe haven

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Italian / Greek bonds as safe haven


(Bloomberg) – After a cautious start to trading on Tuesday, the prices of government bonds from the euro area rose in the wake of Treasuries. Above all, the long end of the yield curves was sought so that they flatten out. The return on the 30-year swaps dipped very slightly below the zero percent mark.

Once again, it was Italian and Greek government bonds that posted the highest drop in yields at the long end of the yield curve. The search for yield continued so that the long end of the BTPs’ yields hit all-time lows again.


Spread tightening from BTPs to Bunds continued unabated


© Bloomberg
Spread tightening from BTPs to Bunds continued unabated


The hope that the European Central Bank will expand its bond purchases, along with the spreads, is likely to be a major driver of the movement in Italian and Greek bonds. The government bonds from the Iberian Peninsula could not keep up with this movement.

Their underperformance is likely due, on the one hand, to the fact that their spreads to the core countries have already narrowed significantly. On the other hand, the political problems in Spain could worry one or the other investor. And ultimately, the return on 10-year paper from Portugal and Spain is only slightly above the zero line and that of 30-year paper is already below 1%.

Fiscal risks that arise from the economic consequences of the pandemic for Italy and Greece are largely ignored. Investors seem to be betting that both the ECB and the development fund will help ensure that the fiscal risks do not affect the individual euro countries. The threat by the Polish government to veto the EU budget and thus the construction fund also went unreacted.

“Poland’s threat of veto for NGEU does not seem credible when you consider that the country is to receive funding over 13% of GDP,” said Christoph Rieger from Commerzbank in a research on Wednesday morning. “However, since these are fewer than some peripheral countries (Greece gets almost 20%), difficult negotiations could still be pending, so that the implementation risks of the major EU plans persist,” continues the head of interest and credit research.

The government bonds from the core countries of the euro area are unlikely to start Wednesday with any changes. At the yield level now reached with 10-year Bunds at around -0.56%, further sustained, significant yield declines will only be possible with strong catalysts – including the fantasy of interest rate cuts, a slump in the stock markets, massive strain on economic activity due to renewed lockdowns.

The euro countries try to avoid the latter. The reins are being or have recently been tightened again in Belgium, Italy and the Netherlands. And depending on the outcome of the talks between the federal government and state leaders, the pandemic rules in Germany could be tightened. France also wants to tighten its corona rules further. If the restrictions imposed lead to a sustained reduction in growth expectations, core land yields could fall further.

The day with Bloomberg: Corona measures, autumn reports

Despite the continuation of the decline in yields on Italian and Greek government bonds, apart from potential profit-taking, there is no sign of a trend reversal for the movement. The chances are again good on Wednesday morning for the outperformance to continue.

Economic data

Industrial production in the euro area as a whole is likely to have improved only slightly in August, as the data published so far from the four largest euro area countries suggest. The weak production data from Germany in particular are likely to weaken the euro area value. Still, the data is likely to have little impact on the bond markets.

Besides, that will Autumn report of the economic modes presented. Due to the latest developments, the experts may have lowered their growth forecast. However, the forecasts are unlikely to have any effect on the performance of Bunds.

In the afternoon US producer prices for September are on the agenda. According to the forecasts, inflation should be very moderate, only 1% – total rate – and 0.5% – core rate – compared to the previous year.


In the US, prices hardly rise at the preliminary stages


© Bloomberg
In the US, prices hardly rise at the preliminary stages


The rise in prices on the preliminary stages should remain very low. The data are not expected to have any impact on Treasury rates.

While things are again quite quiet on the data front, many central bankers from the euro area and the US will make appearances. In Europe, these are the ECB President Christine Lagarde, the ECB chief economist Philip Lane, the board member Yves Mersch and the central bank chiefs of the French central bank Francois Villeroy de Galhau and the Spanish central bank Pablo Hernandez de Cos.

After their appearances in recent weeks, however, there is hardly any news that will move the bond markets beyond short-term fluctuations in yields. Rather, investors are already turning their attention to the meeting of the Governing Council, which begins in two weeks’ time. On top of this, further monetary easing should continue despite different assessments be prepared for the future course.

After all, the yields on government bonds from the periphery, led by Italian bonds, have plummeted, partly because of the expectation of a renewed expansion in bond purchase volumes. Disappointed expectations, on the other hand, are likely to result in more yield and spread volatility again. The ECB might then have to intervene more in the market than in the past few weeks.

With Robert Kaplan, Richard Clarida and Randal Quarles, three voting members appear in the FOMC. The President of the Richmond Fed, Thomas Barkin, will comment on this. Provided that the Fed representatives make statements about economic development, they are likely to point out the risks to the upswing and demand renewed fiscal support.

The willingness of the Fed to loosen monetary policy further is likely to be low without a fiscal package. The President of the San Francisco Fed, Mary Daly, who is not eligible to vote in the FOMC, described the current monetary policy as appropriate. Overall, no new impetus for Treasuries is to be expected from the appearances of the US central bankers.

Primary market

The German finance agency and the Portuguese treasury become active with bond increases.

The planned increase in the volume in circulation for the German 30-year benchmark of 1 billion euros is manageable. Due to the maturity of the federal bond with a volume of 19 billion euros, the placement should receive support, although yields of -0.13% are less attractive for German cross-country skiers. Nonetheless, the demand for the bond is likely to exceed supply, especially since the federal government’s low issuance volume in the current fourth quarter promotes scarcity premiums.

The Portuguese Treasury is with Due dates October 2028 and April 2037 active in the medium and long segment with its increases. The planned issue volume of up to 1 billion euros is low. Therefore, the placement should be possible without a lasting deterioration in the willingness of investors and thus without concessions.

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