Europe's bond yields fall to lowest since the Black Death
'What we are seeing is the "Japanification" trade. The eurozone is sinking into corrosive deflation,' warns RBS
|
|
|
|
|
|
BoA said the economic outlook in the
eurozone will 'deteriorate substantially' if the ECB is prevented from
carrying out QE for political reasons Photo: Rex Features
7:41PM GMT 02 Jan 2015
953 Comments
Bond yields have plummeted to record lows across the eurozone as deflation
becomes lodged in the system and markets bet on a blitz of asset purchases
by the European Central Bank this month.
German five-year yields dropped below zero for the first time ever, touching
-0.007pc on the first day of new year trading, implying that investors are
willing to pay the German government to store their money for the rest of
this decade.
Italian, Spanish and Portuguese yields have seen spectacular drops over the
past two trading days. The French state can borrow for five years at a rate
of 0.13pc, and Ireland can do so at 0.32pc.
Nothing like this has been seen in European history since the 14th century,
after the depletion of silver mines set off a slow monetary contraction, followed
by Edward III's default on debts to Italian banks and the Black Death soon
after, compounding a deflationary collapse.
“What we are seeing is the 'Japanification' trade,” said Andrew Roberts,
credit chief at RBS. “The eurozone is sinking into corrosive deflation and
it is too late to stop. We think the inflation rate in December may already
have been negative. The ECB are in trouble, and they know it.”
Related Articles
Mario Draghi, the ECB’s president, told Germany’s Handelsblatt that a slip
into deflation “cannot be ruled out completely” and admitted that the bank
is at mounting risk of breaching its price stability mandate.
Mr Draghi said the ECB is “making technical preparations” to boost its balance sheet in early 2015, but offered no fresh clues on how much it will be or whether the measures will include full quantitative easing in the form of sovereign bond purchases.
Investors have taken his comments as a strong hint of QE as soon as this month, even though he repeated his usual caveat that new measures will be undertaken only “should it become necessary to further address risks of a too prolonged period of low inflation”.
His interview may have been the trigger for the latest dash for EMU sovereign debt. There are not enough bonds to buy from certain countries if the ECB sweeps into the market on a grand scale.
Bank of America said there would be an acute shortage of German debt since Berlin plans to run a budget surplus this year and will therefore be retiring bonds gradually instead of issuing them. The ECB would quickly run out of Latvian or Greek bonds trading on the open market.
The US bank predicted bond purchases of between €180bn and €360bn a year, warning that the economic outlook will “deteriorate substantially” if the ECB is prevented from carrying out QE for political reasons.
Mr Draghi is clearly walking through a political minefield. The Bundesbank continues to resist QE, arguing that lower oil prices are a shot in the arm for the real economy and therefore make monetary stimulus less necessary - even if it depresses headline inflation.
Michael Fuchs, a leader of the ruling Christian Democrats and a close advisor to Chancellor Angela Merkel, warned Mr Draghi on Friday that QE would merely take pressure off the crisis states and allow them to delay reforms. He stated pointedly that a Greek withdrawal from the euro might actually strengthen monetary union, adding that the ECB should not be in the business of propping up peripheral debt markets.
“The situation has completely changed. It was far more critical three or four years ago. Greece is hardly more than 1pc of the eurozone GDP, which shows that it really isn’t a big risk at all,” he said. The risk for asset markets is that they are already taking full QE for granted and ignoring persistent warning signals from Berlin.
Mr Draghi may be forced to accept a compromise on QE, either by scaling back his plans or by accepting a formula where the national central bank of each EMU state buys only the bonds of its own government, with no pooling of risk.
Critics say this would be highly risky. It would further fragment the euro system, and might cause markets to have second thoughts about the stimulus effects of QE. Yet Germany remains adamant that there must be no fiscal union by the back door.
Mr Draghi’s comments also had the intended effect of driving down the euro to $1.2034 against the dollar, the lowest since the Greek crisis in June 2010. Fresh “COFER” data from the International Monetary Fund show that central banks from the G10 rich states and emerging markets became net sellers of eurozone bonds in the third quarter of 2014 – even when adjusted for currency valuation effects.
Jens Nordvig, from Nomura, said the euro share of global foreign reserves has fallen from 26pc to 22.6pc over the past four years. The dollar share has surged to 62.3pc and is continuing to rise – breaking normal patterns - even as the dollar strengthens.
“This is extraordinary. Normally central banks counter the moves by the private sector and smooth out some of the fluctuations as they replenish reserves, but this time they are not doing so. I think we could see the euro fall to $1.15 within one or two months,” he said.
Mr Draghi said the ECB is “making technical preparations” to boost its balance sheet in early 2015, but offered no fresh clues on how much it will be or whether the measures will include full quantitative easing in the form of sovereign bond purchases.
Investors have taken his comments as a strong hint of QE as soon as this month, even though he repeated his usual caveat that new measures will be undertaken only “should it become necessary to further address risks of a too prolonged period of low inflation”.
His interview may have been the trigger for the latest dash for EMU sovereign debt. There are not enough bonds to buy from certain countries if the ECB sweeps into the market on a grand scale.
Bank of America said there would be an acute shortage of German debt since Berlin plans to run a budget surplus this year and will therefore be retiring bonds gradually instead of issuing them. The ECB would quickly run out of Latvian or Greek bonds trading on the open market.
The US bank predicted bond purchases of between €180bn and €360bn a year, warning that the economic outlook will “deteriorate substantially” if the ECB is prevented from carrying out QE for political reasons.
Mr Draghi is clearly walking through a political minefield. The Bundesbank continues to resist QE, arguing that lower oil prices are a shot in the arm for the real economy and therefore make monetary stimulus less necessary - even if it depresses headline inflation.
Michael Fuchs, a leader of the ruling Christian Democrats and a close advisor to Chancellor Angela Merkel, warned Mr Draghi on Friday that QE would merely take pressure off the crisis states and allow them to delay reforms. He stated pointedly that a Greek withdrawal from the euro might actually strengthen monetary union, adding that the ECB should not be in the business of propping up peripheral debt markets.
“The situation has completely changed. It was far more critical three or four years ago. Greece is hardly more than 1pc of the eurozone GDP, which shows that it really isn’t a big risk at all,” he said. The risk for asset markets is that they are already taking full QE for granted and ignoring persistent warning signals from Berlin.
Mr Draghi may be forced to accept a compromise on QE, either by scaling back his plans or by accepting a formula where the national central bank of each EMU state buys only the bonds of its own government, with no pooling of risk.
Critics say this would be highly risky. It would further fragment the euro system, and might cause markets to have second thoughts about the stimulus effects of QE. Yet Germany remains adamant that there must be no fiscal union by the back door.
Mr Draghi’s comments also had the intended effect of driving down the euro to $1.2034 against the dollar, the lowest since the Greek crisis in June 2010. Fresh “COFER” data from the International Monetary Fund show that central banks from the G10 rich states and emerging markets became net sellers of eurozone bonds in the third quarter of 2014 – even when adjusted for currency valuation effects.
Jens Nordvig, from Nomura, said the euro share of global foreign reserves has fallen from 26pc to 22.6pc over the past four years. The dollar share has surged to 62.3pc and is continuing to rise – breaking normal patterns - even as the dollar strengthens.
“This is extraordinary. Normally central banks counter the moves by the private sector and smooth out some of the fluctuations as they replenish reserves, but this time they are not doing so. I think we could see the euro fall to $1.15 within one or two months,” he said.
