Forex4you - Analytics

Forex4you

492.25 7.25/10
57% of positive reviews
Real

Eurozone’s bond selloff: what is the reason?

Last week, the ten-year German bonds yield rose from 0.5% to 1%, that is, to the levels of last September, when the ECB didn’t carry out any massive government bond purchases, and the question of quantitative easing in the Euro area was unresolved.

“What is the reason of this bond sale?” – wondered traders and analysts, putting forward different versions of what happened. Let me briefly express my opinion.

In my opinion, the selloff was driven by the two following factors:

  •  The first – the threat of a Greek default. Investors knew that June 5 is approaching – the deadline, when Greece had to pay the IMF money, which it doesn’t have. They also saw that negotiations on a new agreement between Greece and creditors clearly stalled, and hopes for the Greek bailout deal until the fifth of June were low. The market began to prepare for the possibility of default. Naturally, many investors chose to get rid of the E-19 bonds.
  • The second factor – the increase of inflation in the Eurozone. Recently it became known that consumer price index in the region moved to the “green” zone for the first six months in May. Therefore, real (i.e. inflation adjusted) bond yields fell sharply. This has led to a decrease in investment interest to the European government debt, especially now, when the recovery of inflation in the Euro area is expected to continue in the coming months.

Coinciding in time, these two factors reinforced one another. Without this overlay the selloff would be less massive. But in a situation where the bond yield is eaten by inflation, and the risks of keeping them are growing on the back of Greek problems, the number of investors to seek to get rid of these securities grows. And then an additional boost to sales came from the ECB president Mario Draghi…

Before Draghi’s press conference, scheduled for June 4, some investors refrained from selling, apparently, expecting the central bank to intervene and support the market. “After all, the ECB has activated an ambitious program of bond purchases to sustain the cost of lending in the region at low, comfortable levels for the borrowers! No, Mario Draghi will not just sit there and watch the European government debt yield growing rapidly! “- they thought.

But Draghi was unperturbed. We must get used to the increased volatility in the market, he said, making it clear that the central bank will not pacify the rising “storm”. After that, desire to sell the Euro bonds has become even bigger …

If my interpretation is correct, we can expect the European bond yields to plummet if the agreement between Greece and creditors is reached.

 

Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

Last week, the ten-year German bonds yield rose from 0.5% to 1%, that is, to the levels of last September, when the ECB didn’t carry out any massive government bond purchases, and the question of quantitative easing in the Euro area was unresolved.

“What is the reason of this bond sale?” – wondered traders and analysts, putting forward different versions of what happened. Let me briefly express my opinion.

In my opinion, the selloff was driven by the two following factors:

  •  The first – the threat of a Greek default. Investors knew that June 5 is approaching – the deadline, when Greece had to pay the IMF money, which it doesn’t have. They also saw that negotiations on a new agreement between Greece and creditors clearly stalled, and hopes for the Greek bailout deal until the fifth of June were low. The market began to prepare for the possibility of default. Naturally, many investors chose to get rid of the E-19 bonds.
  • The second factor – the increase of inflation in the Eurozone. Recently it became known that consumer price index in the region moved to the “green” zone for the first six months in May. Therefore, real (i.e. inflation adjusted) bond yields fell sharply. This has led to a decrease in investment interest to the European government debt, especially now, when the recovery of inflation in the Euro area is expected to continue in the coming months.

Coinciding in time, these two factors reinforced one another. Without this overlay the selloff would be less massive. But in a situation where the bond yield is eaten by inflation, and the risks of keeping them are growing on the back of Greek problems, the number of investors to seek to get rid of these securities grows. And then an additional boost to sales came from the ECB president Mario Draghi…

Before Draghi’s press conference, scheduled for June 4, some investors refrained from selling, apparently, expecting the central bank to intervene and support the market. “After all, the ECB has activated an ambitious program of bond purchases to sustain the cost of lending in the region at low, comfortable levels for the borrowers! No, Mario Draghi will not just sit there and watch the European government debt yield growing rapidly! “- they thought.

But Draghi was unperturbed. We must get used to the increased volatility in the market, he said, making it clear that the central bank will not pacify the rising “storm”. After that, desire to sell the Euro bonds has become even bigger …

If my interpretation is correct, we can expect the European bond yields to plummet if the agreement between Greece and creditors is reached.

 

Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!



To leave a comment you must be or register