No hold for peripheral demand in sight

No hold for peripheral demand in sight

(Bloomberg) – Once again, the prices of government bonds from the periphery were able to gain some strong gains on Friday. The Italian papers were particularly sought after. Their lead in returns continues to make them very attractive to investors.

Spread levels from before the 2018 general election are targeted

© Bloomberg
Spread levels from before the 2018 general election are targeted

The well-known risks from the expansion of debt as measured by gross domestic product and the high budget deficits are not currently scaring investors. The political situation also proved to be stable. In the meantime, the 5-year-old BTPs are also getting ready to scratch the zero return line. With a current return of 0.1%, the way is not far.

Spanish government bonds followed well behind the BTPs. Due to the economic and political problems in the country, they lagged significantly behind the movement of Italian government bonds.

BTP bono spreads are moving towards pre-May 2018 values

© Bloomberg
BTP bono spreads are moving towards pre-May 2018 values

With the expansion of measures to contain the spread of the virus infection, the economic risks for the country increase. In addition, the minority government still faces a major test with the adoption of the budget.

On Friday evening, Fitch changed the outlook for Latvia’s rating from negative to stable. This change is unlikely to have a major impact on returns. However, it made it clear that despite the economic impact of the pandemic, improvements in credit ratings are possible.

With a view to the development of yields, especially on government bonds from the periphery, intervention by the European Central Bank in bond trading in the past reporting week was hardly necessary. Returns fell. The spreads against the core countries narrowed. The credit transmission mechanism is unlikely to have been hindered accordingly. The ECB may have held back with bond purchases in order to conserve the purchase volume.

The government bonds from the core countries of the euro area should start the day with price gains despite the rising US and European equity futures. The economic effects of the second wave of pandemics in Europe will lead investors to act very cautiously. The bond prices were supported in early Asian trading by a rising Treasury future. Due to the bank holiday in the USA, bond trading is suspended.

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In addition, with regard to the US economic stimulus package, which many investors seem to be counting on to pass before the election, barely something. Despite the Republicans’ $ 1.8 trillion bid, the parties are far apart on numerous details. There is considerable opposition in the Republican ranks to such high additional spending.

The closer the election date approaches, the less likely an agreement becomes. Despite appeals from the US Federal Reserve to politicians to provide more money to support the economy, an agreement is now unlikely.

The bonds from the euro periphery should be able to further expand their price gains despite the good performance in the past few days. Returns are still sought. And as long as the introduction of the development fund does not wobble and the European central bankers keep up the imagination that monetary policy can be eased again, bond prices on the periphery should be well supported.

However, the risk of profit-taking is growing, especially in view of the recently achieved low returns for BTPs.

Economic data

Economic data from the euro area, which could give government bond yields a direction or orientation, is not due on Monday. However, the annual meeting of the International Monetary Fund and the World Bank begins.

In addition, numerous European central bank representatives have again made their views known. At the weekend there were already numerous voices emphasizing the need for additional monetary policy easing steps.

With Isabel Schnabel, Luis de Guindos, Fabio Panetta and the ECB President Christine Lagarde, at least four members of the Executive Board of the ECB will make public appearances. In addition, statements by the French central bank chief Francois Villeroy de Galhau come in the morning.

Investors should be hoping for new insights into how the central bankers assess the economic effects of the second wave of the pandemic and whether, due to the weak inflationary trend, a further easing of monetary policy through the expansion of the volume of bond purchases can be expected soon.

It is also of interest whether the European central bankers will urge politicians to take additional fiscal policy action to combat the economic weakness in the euro area. Ultimately, the ECB would be ready to keep yield levels and spreads low despite the increase in debt.

Primary market

With extensive maturities from Germany with the repayment of a federal bond with a volume of 19.1 billion euros and the repayment of an Italian government bond with a volume of around 15.3 billion euros, the placements on the capital market are very well supported this week.

On the capital market, Lithuania will compete with the Increase a bond that runs until August 2029. The issue volume should be in the range of 20 to 30 million euros. At least that is what the previous increases indicate. Investors will be able to cope with this without any problems.

Germany and France become active in the money market. The German finance agency will raise 3 billion euros with short-term contracts with terms of around three and around ten months. France will be on the money market with three treasures with maturities between three and twelve months up to 6.3 billion euros place. This contrasts with maturities from France with a volume of around 7.2 billion euros. Money market paper should be absorbed overall without any problems.

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