‘World’s Most Expensive’ Bonds Tested By the EU’s Latest Plan

‘World’s Most Expensive’ Bonds to Be Tested by EU Recovery Fund

John Ainger

27 May 2020, 07:58 PM IST

(Bloomberg) --

What’s good for Europe is bad for its safest asset: German bonds.

With the European Commission set to propose issuing 500 billion euros ($548 billion) in grants -- and tentative signs even the most frugal nations may be willing to compromise -- an important pillar of support may be removed for German debt.

The plan allays fears of an imminent split in the European Union, which typically fuels buying of German bonds as they are seen as one of the safest assets money can buy. The EU recovery fund proposal from France and Germany would involve the Commission selling bonds -- giving rise to a potential rival to the securities.

‘World’s Most Expensive’ Bonds Tested By the EU’s Latest Plan

“Bunds are the world’s most expensive fixed income,” wrote NatWest Markets strategists led by Giovanni Zanni, recommending that investors short German bonds and buy those of Europe’s periphery. “Europe’s attractiveness to global yield hunters has vanished.”

German debt fell, with the yield on 10-year bonds rising three basis points to minus 0.40%. The spread versus the swap rate -- a key gauge of political risk -- narrowed to the tightest level since 2016. Bonds rallied acros much the euro area and the shared currency reversed a drop.

Market Highlights
Italian 10-year yield down six basis points to 1.49% Equivalent Greek yield down nine basis points to 1.58% Spain’s debt misses out on the rally, with its 10 yield up two basis points at 0.65% Euro turns around to rise 0.1% on the day to $1.0989 Yield spread on 10-year German versus British debt set to be the lowest since 2013

Steven Major, HSBC Holdings Plc’s global head of fixed income research, told Bloomberg TV the plan was a “game changer” that could send buyers into the debt of Italy, Greece, Portugal and Spain.

Commission President Ursula von der Leyen’s recovery proposal -- which is set to also include 250 billion euros of loans -- marks what could be a significant turning point in the integration of the region. But disagreement still remains between the Franco-German plan and the more frugal members of the bloc, such as Austria and the Netherlands.

The Spoils

Under the proposals, Italy would get 81.8 billion euros, Spain 77.3 billion euros, Greece 22.5 billion euros and France 39 billion euros, according to another official familiar with the details.

“This doesn’t look like Italy will be the main beneficiary when compared to the size of its economy,” said Antoine Bouvet, senior rates strategist at ING Groep NV. “Smaller countries such as Spain and Greece stand to benefit a lot more.”

What Bloomberg Intelligence says
“Bunds continue to be dominated by ECB depo rate expectations and any large deviations from the short end may see it faded through option skews” -- Tanvir Sandhu, Chief Global Derivatives Strategist

What Bloomberg Intelligence says

“Bunds continue to be dominated by ECB depo rate expectations and any large deviations from the short end may see it faded through option skews”

-- Tanvir Sandhu, Chief Global Derivatives Strategist

Euro Comeback Rests on EU Leaders Agreeing on Recovery Fund

Bunds are also contending with record bond supply that JPMorgan Chase & Co. estimates will total over 1 trillion euros this year in the euro zone. While much of that is being sucked up by the European Central Bank’s stimulus measures, a German court ruling earlier this month raised the possibility that the Bundesbank may have to stop buying under the original quantitative easing program.

The German government too is preparing what could be a bigger stimulus program than the Marshall Plan that followed World War II. It could total as much as 150 billion euros of extra spending, which would need to be financed by extra debt.

Tactical shorts on bunds entered at the start of the week were a “no-brainer,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, who sees stimulus possibly totaling around 100 billion euros. “The juice could be in the details.”