Sovereign debt market developments this week were marked by 6 main events:
- The ECB’s first week without purchases under the SMP (on Monday)
- The achievement of a deal for the second bailout package for Greece, between Monday and Tuesday
- The DSA report on the likely necessity of a third Greek bailout (on Tuesday)
- The Euro-Zone Flash PMI figures for February (on Wednesday)
- The European Commission interim economic forecasts (on Thursday)
- Italy’s successful soverign debt auction (on Friday)
In Greece the Euro-Zone agreement reached on Tuesday (Technicalities here) had an interesting effect. While in the more immediate (2 and 5 years) term it led to an increase in yields, the opposite was the case for the longer term yields of 10 year bonds. Clearly, the explanation is, as was intended, that the agreement destroys the value of a lot of short term Greek debt in order to facilitate the sustainability of longer term debt position of Greece. As a result, short term debt becomes riskier and longer term debt becomes safer, leading the yield curve or the term premium to shift.
Of course the FT leaked DSA report stating that Greece was likely to require another bailout put pressure back on all maturities of Greek debt as well as on its growth path. However, as the report was leaked on Tuesday, rather than on Wednesday this explanation is problematic. It could be that it took a day for markets to pick up on the leak. Alternatively, it is also possible that this report was not substantial to the movements of the Greek sovereign debt yields in that it might have reflected an already known fact in the markets. In this case, the shift on Wednesday might be better explained by the PSI figures published on that day.
On the Spanish front, I believe that the overwhelming driver of bond yield movements was the absence of renewed purchases under the SMP, as described by the latest ECB weekly financial statement, published on Monday. This implied a level of stability in Spanish markets which might have provided some trust in the markets. In Italy however, the effect of this information was very temporary, and upwards pressures returned on Wednesday ahead of the Friday’s government bond auction. Clearly, the good performance of that debt auction provided the necessary good news to end the week on a fall in Italy sovereign bond yields.
Portugal‘s debt yield movements are difficult to untangle, particularly on the 2 year maturity front. Explaining the spike on Wednesday is rather difficult. In the absence of relevant data releases and of particularly revealing news about economic or political developments, the only explanation is clearly noise. Evidence of this is provided by the International Business Times, which relates the coincidence of the spike in 2 year yields and the comments of the Portugal Industry Confederation Chief that Portugal required another €30 Bn in bailout. The FT’s coverage of this implies an alternative narrative, where the shift in Portuguese debt were the result of contagion fears from the Greek default. Either way, given the temporary nature of the spike, and the reversion towards the initial point, I am inclined to believe that the spike was not caused by any new insight into the fundamentals of Portuguese economic conditions, but rather by irrational fears, that seem to have vanished within 24 hours. While the 5 year maturities behaved like the Belgian ones, the 10 year ones behaved like the Greek ones.
I believe that the shifts in the yields of Belgium can probably be understood as the result of the weak flash PMI figures for February, while Germany and France continue to enjoy the status of safe havens.
I’m sure many more interesting things happened. For complementary comments on financial market developments you might be interested in reading the Keystone Speculator blog. You might also want to pay a visit to the EU Blogging Portal’s “The Week in Bloggingportal” as well as the blogroll itself.
- Weekly Bond Yield developments in the Euro Area (W7.2012): GDP, Industrial Production, Debt Swaps and ECB Seniority
- Weekly Bond Yield developments in the Euro Area (W30.2011): Decaying Core & Differentiated Periphery