Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Posts Tagged ‘bond yields’

Germany for First Time Sells 30-Year Bonds Offering Negative Yields

Posted by hkarner - 22. August 2019

Date: 21-08-2019
Source: The Wall Street Journal

Bond sale adds to the roughly $15 trillion of negative-yielding bonds outstanding world-wide

Germany sold 30-year bonds at a negative yield for the first time, in another sign of how investors’ desperation for safe assets is inflating their value.

The bond, set to mature in August 2050, has a zero coupon, which means it pays no interest at all. Yet investors were still willing to pay more than face value to buy €824 million ($914 million) worth of the debt, pushing the overall yield on the bond into negative territory, at minus 0.11%. Yields fall as bond prices rise.

The German sale adds to the roughly $15 trillion of negative-yielding bonds outstanding world-wide, many of which are from European governments or are state-sponsored agency bonds. It also adds to the smaller—but still significant—amount of new bonds that have been sold with a negative yield at issue.

More than $3 trillion of bonds have offered a negative yield when they were first sold since 2016, according to data from Barclays. While this is mostly government and agency debt, it also includes more than $11 billion of corporate debt, from companies such as French drugmaker Sanofi SA and German consumer-goods company Henkel AG.

The list of such bonds has even included euro-denominated debt from U.S. tobacco group Philip Morris International Inc., which sold €500 million of seven-year bonds at a yield of minus 0.18% at the end of July, according to Barclays data.

In the latest sale, Germany sold the bonds at an average price of 103.61. That means the government will pay back €795 million in 30 years’ time for the €824 million it has borrowed.

The last time Germany sold similarly long bonds was last month, when it tapped its outstanding August 2048 issue again, and investors bought the debt at a yield of 0.3%. The first sale of these bonds, in September 2017, achieved a yield of 1.3%.

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Italy Issues a Euro Dare to Germany

Posted by hkarner - 13. Oktober 2018

Date: 12-10-2018
Source: The Wall Street Journal

Rome would be foolish to leave the currency, but it could accidentally goad Berlin to push it out.

Italian Minister of Economy and Finance Giovanni Tria

There Italy goes, threatening to blow up the euro again. The uproar over the budget proposal put forward by the new left-right insurgent government has reignited fears that the eurozone’s third-largest economy is on the path to fiscal ruin and will drag the rest of the currency bloc down with it. It could happen, although not in the way or for the reason you may think.

The numbers look bad. The coalition of the right-wing League and sort-of-left-wing 5 Star Movement is proposing to overspend revenues by 2.4% of gross domestic product for the next few years—and that’s if GDP growth meets their rosy assumptions. This is a crisis, we’re led to believe, compared with the 1.6% of GDP deficit Brussels might otherwise have accepted from technocratic Economy Minister Giovanni Tria.

If a 0.8-point difference in budget projections sounds to you like a flimsy reed on which to hang a currency crisis, you’re not alone. The strongest case for the degree of upset this budget is causing is that it’s clear Rome’s new leaders have no plan for paying down a national debt equal to 130% of GDP. Italy is probably too big to be saved by other eurozone countries—and were it to renege on its debts, it could well bring down a smattering of French and German banks with it. Den Rest des Beitrags lesen »

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Yields on Italian Bonds Hit 4½ Year High on Budget Concerns

Posted by hkarner - 9. Oktober 2018

Date: 08-10-2018
Source: The Wall Street Journal

Selloff of Italian bonds and banks revives concerns over the “doom loop” between weak lenders and fragile government finances

Investors continued to sell off Italian government bonds on Monday as the country’s populist government clashed with the European Union over budget targets.

Yields on the country’s 10-year bonds hit a 4½ year high, rising 17 basis points to 3.593%. The two-year bond yield jumped to 1.557% near its highest level since June. Bond yields move inversely to prices.

Italian stocks sold off with the FTSE MIB shedding 2.3%. A potential ratings downgrade of the country’s debt by major credit credit-rating firms also weighed on sentiment, analysts said. Banking stocks also suffered heavy losses, Banco BPM losing 5.8% and UBI Banca falling 4.9%.

The moves put pressure on the broader European market, with the euro falling by 0.4% against the dollar.

“Step by step, the pressure on Italy is ratcheting up,” said Richard McGuire, head of rates strategy at Dutch lender Rabobank. “The danger is of this becoming a self-fulfilling prophecy.”

Italian shares and government bonds have been selling off in recent days after the government significantly widened its budget-deficit target for next year to 2.4% of gross domestic product, creeping closer to the EU’s 3% limit.

Late last week, the European Commission, the EU’s executive arm, said Italy’s budget plans are a “significant deviation” from the recommended fiscal policies and a “source of serious concern.”

On Monday, Italy’s interior minister, Matteo Salvini, criticized European Commission President Jean-Claude Juncker and Economics Commissioner Pierre Moscovici. Den Rest des Beitrags lesen »

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Italy’s Old New Populism

Posted by hkarner - 8. Oktober 2018

Paola Subacchi

Paola Subacchi is a senior fellow at Chatham House and visiting professor at the University of Bologna. She is the author, most recently, of The People’s Money: How China Is Building a Global Currency .

Long-term economic and social considerations almost inevitably collide with short-term political objectives. This is all the more true for populists like those in Italy’s coalition government, which recently unveiled an imprudent and even dangerous draft budget.

CANBERRA – Italy’s coalition government, comprising the anti-establishment Five Star Movement (M5S) and the far-right League party, made headlines recently for its new draft budget, which violates European Union rules. But this is hardly the first Italian government to make over-the-top promises and squander public money to pay for them. In fact, when all is said and done, Italy’s new populism is not new at all.

The government’s proposed budget promises to increase borrowing to finance a 2.4%-of-GDP deficit in 2019 and the following two years. While this would not cross the EU’s 3%-of-GDP ceiling on budget deficits, it is considerably more than the 1.6% that the finance minister informally agreed with the EU over the summer. Den Rest des Beitrags lesen »

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Why Italy’s government bonds are so unstable

Posted by hkarner - 9. September 2018

Date: 06-09-2018
Source: The Economist: Buttonwood

If you fret about the euro’s survival, Italian bonds might be the last asset you sell

A SHREWD observer of London’s after-work drinking culture once offered the following bit of mathematical heterodoxy to explain it: “There is no number between two and six.” If you go out with colleagues and stop at two drinks, you will be able to summon the will to go home at a reasonable hour. After a third drink, another will seem like a good idea—and another, and another. You will be on course for a hangover.

A modified version might apply to Italy’s bond market. As long as yields are two-point-something or lower, they are sustainable. At that level, the bonds are safe. Italy’s public finances are stable. As yields rise above 3%, they may become unmoored. The bonds start to look like speculative instruments. The stability of public finances is in question. Yields might plausibly spike to 6% or more.

It is thus a source of anxiety that Italy is on its metaphorical third pint, with yields on ten-year government bonds hovering around the 3% mark. In part this reflects lingering concerns that Italy’s coalition government will table a budget for 2019 that breaks the euro zone’s fiscal rules. More generally, investors are asking themselves what is the right price for Italian risk. The wiser among them admit that they simply do not know. For Italy’s bonds come with a set of implicit options attached that make them tricky to price.

To make sense of Italy’s bond markets, it helps first to make a distinction between safe assets and credit securities. An American Treasury bond is the archetypal safe asset. Yields are largely determined by the interest-rate policy of the Federal Reserve. Bondholders do not worry much about the federal government’s ability to service its debts, which are, after all, in the currency it issues. The typical credit security is a dollar bond issued by a company, such as GM or Apple, or by a country, such as Brazil or Mexico. Its yield will vary with that of a Treasury of the same maturity, with an interest-rate premium, or “spread”, to compensate bondholders for the risk that the borrower might not earn enough dollars to pay its debts. Den Rest des Beitrags lesen »

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Bond yields reliably predict recessions. Why?

Posted by hkarner - 30. Juli 2018

Date: 27-07-2018
Source: The Economist: Free exchange

An inverted yield curve may mean a few things, none of them cheering

AS NAMES for market phenomena go, “inverted yield curve” lacks a certain punch. It is no “death cross” or “vomiting camel”. But what it lacks in panache, the inverted yield curve more than makes up for in predictive potency. Just before each of America’s most recent three recessions the yield curve for government bonds “inverted”, meaning that yields on long-term bonds fell below those on short-term bonds. Economists and stockmarkets seem unconcerned that inversion looms again (see chart). But despite generally strong economic data, there is reason to heed the warning signs flashing across bond markets.

There is nothing particularly magical about the yield curve’s predictive power. Short-term interest rates are overwhelmingly determined by changes in central banks’ overnight policy rates—for example, the federal funds rate in America, which has risen by 1.75 percentage points since December 2015. Long-term rates are less well-behaved. They reflect the average short-term rate over a bond’s lifetime, but also a “term premium”: an extra return for holding a longer-term security.

An inverted yield curve may mean a few things, none of them cheering. Markets may expect future short-term rates to be lower than present ones, presumably because the central bank has chosen to cut rates in response to economic weakness. Or markets may think they need less compensation for holding long-term bonds in the future. That might reflect expectations that inflation will fall, or that appetite will grow for the safety provided in financial storms by long-run government debt. Den Rest des Beitrags lesen »

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Higher Rates Hide a World of Easy Money

Posted by hkarner - 27. April 2018

Date: 26-04-2018
Source: The Wall Street Journal

The direction and pace of travel for yields probably matters just as much as the level

America first. The 10-year U.S. Treasury yield has returned to 3% for the first time since early 2014 and markets are clearly sensitive to higher rates. But the bigger picture is that investors are still living in a world with very low rates.

That can be seen in several ways. The first is obvious: yields in other advanced economies are still nowhere near where they were in 2014, with central banks like the European Central Bank way behind the Federal Reserve in tightening policy. Germany’s 10-year yield is 0.64%, down from close to 2% at the start of 2014; Japanese yields are stuck close to zero thanks to the central bank’s yield-curve control. Den Rest des Beitrags lesen »

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Wall Street’s 2017 Market Predictions: Pathetically Wrong

Posted by hkarner - 25. November 2017

Date: 24-11-2017
Source: The Wall Street Journal

Forecasting is difficult, but this year showed exactly how pointless it can be: Markets performed opposite of virtually all predictions

We all like to remember our successes and forget our failures, and finance is no different. As investors’ inboxes once again become clogged with annual outlooks from Wall Street’s scribblers, there is little admission of the nearly universal failure to predict what happened this year—even though the things the analysts missed are much more interesting than their forecasts.

There are two big lessons to learn from the mistakes of the year-end crystal-ball gazing. The first is that when everyone agrees that prices can only go in one direction, it is dangerous. The second is more nuanced: We really know an awful lot less about how the economy works than we thought. Den Rest des Beitrags lesen »

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$2 Trillion Later, Does the Fed Even Know if Quantitative Easing Worked?

Posted by hkarner - 23. September 2017

Date: 22-09-2017
Source: The Wall Street Journal

As the central bank sets out to reverse quantitative easing, there are at least three reasons not to worry too much about its impact on markets—and one good reason to be concerned

U.S. Federal Reserve Chairwoman Janet Yellen  after the central bank indicated it remained on track to raise short-term rates later this year and said it would begin shrinking its portfolio of bonds next month.

After spending $2 trillion on government bonds in an effort to stimulate the economy, the U.S. Federal Reserve can hardly admit that it doesn’t know how, or even if, it worked.

Fed Chairwoman Janet Yellen on Wednesday came as close as she’s ever likely to get to accepting that quantitative easing is still poorly understood even by the experts. Explaining why the central bank prefers to set short-term rates rather than buy or sell stuff, she said it was because “we believe we understand pretty well what the effects [of rate changes] are on the economy,” and so do investors. Left unsaid: No one’s really sure how, or if, QE works.

This matters enormously to investors as the Fed sets out on quantitative tightening. It’s starting small, allowing a maximum of $10 billion of bonds a month to mature without the money being reinvested. But in a year, that will be up to $50 billion a month—more than the Fed bought each month during the first phase of QE3 in 2013. Den Rest des Beitrags lesen »

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Forget Trump v. Congress. The Real Political Danger’s Still in Europe

Posted by hkarner - 29. März 2017

Date: 28-03-2017
Source: The Wall Street Journal

Italy is the biggest political threat on the horizon for investors

Beppe Grillo leads the 5 Star Movement, which wants Italians to have a national vote on whether to leave the eurozone.

Politics has been a big driver of markets, but investors may be worrying about the wrong politics. Squabbling over health care hurts the chance of a big U.S. tax cut, and the neurotic can find plenty to fear in the French presidential election. Much less attention has been paid to the biggest political threat on the horizon for investors: Italy.

Italian elections are events investors have learned to disregard after 44 governments in 50 years. The next election might be different, thanks to the potential for a nasty three-way feedback loop between populist politics, the European Central Bank and the bond market.

To see how it could go wrong, think about things from the point of view of holders of Italian government bonds. Their ever-present worry is a repeat of 2011, when a standoff between a populist Italian prime minister and the rest of Europe pushed 10-year yields above 7% (they are now at just 2.37%, even after more than doubling since last summer). Den Rest des Beitrags lesen »

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