Friday, 2 September 2011

What is going on with Eurobond rates

A BBC type was warbling on this morning about how successful the EU had been in reducing PIGS' bond rates. I update my table of 10 year bond rates below:

              11th July             15th July             18th July               16th August     2nd Sept

Greece  17.19% (14.52)  17.71% (15.02) 18.23% (15.57)   15.51 (13.18) 18.28(16.18)

Ireland   13.62% (10.96)  14.27% (11.58) 14.45% (11.79)   10.18 (7.85)     8.73(6.63)

Portugal13.28% (10.61)  12.93% (10.24) 12.84% (10.18)  10.90 (8.57)    10.50(8.40)

Spain        6.08% (3.41)     6.07% (3.38)      6.32% (3.67)      5.02 (2.69)      5.10(3.00)

Italy          5.72% (3.05)      5.77% (3.09)    5.99% (3.34)       5.04 (2.70)      5.20(3.10)

Well other than Greece the BBC type has a prima facie case but how was this achieved and at what cost? If you note from the above table Italy is now seen as riskier than Spain whereas two months ago it was the opposite. I suspect the reason is that there is a much bigger  volume of Italian bonds than Spanish in the market. The ECB under political pressure has possibly been buying Italian and Spanish bonds in equal amounts so the relative effect on Spanish bonds has been greater.

Clearly the market likes what Ireland is doing and to a lesser extent Portugal. Both these countries have implemented austerity programmes credible to the markets. But the Italian and Spanish situation is dependent on the ECB continuing to buy up their paper already in the market. How much has the ECB spent doing this is a closely guarded secret but I guess its something well North of 100bn€, something that goes down badly in Germany.

The Italian 10 year bond auction on Tuesday this week showed how little appetite there is for further Italian paper. The Italians sold 7.74€bn at a rate of 5.22%. The ECB had to go into to the market after the auction to stabilise the rate and the general feeling is the ECB will now concentrate on buying Italian bonds of which there is a huge amount out there.

The crunch however will come in Germany. Merkel's government could easily fall and if so all bets are off.

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