Market Turmoil Twaddle

Generali

As you may have read (link if you have not), Germany failed to find buyers about 35% of the 10 year bonds offering a 1.98% coupon that they were trying to sell.

There are plenty of articles in the papers about how this signals the end of the Euro forever and it shows that the market for all European debt is falling apart. To use a slightly arcane piece of economic jargon, this analysis is ‘Grade 1 twaddle, balderdash, guff and bunkum’ (please stop me if this is too technical).

Just think about this for a minute. The German Government is trying to borrow money over 10 years at a fixed rate of 1.98% a year. That means (in slightly simplified terms) if you lend them EUR100, you will get a ‘coupon’ (interest payment) of EUR1.98 and after 10 years get your EUR100 back.

However, German inflation is running at either 2.49% or 2.85% depending which measure you prefer (link). That means that the German Government is effectively expecting people to pay them money for the privilege of lending to them! The amazing bit for me is that they found so many takers, not that they failed to sell everything.

Don’t get me wrong, the Eurozone as a whole is facing a raft of problems including how to continue to fund their deficits. However, this is neither a symptom nor a cause of that.

Mrs_Bones

I thought Germany was the country with all the money that was expected to lend to those other Eurozone countries in trouble. How are they going to do that if they have to borrow for themselves?

gailey_2

Generali wrote: »

As you may have read (link if you have not), Germany failed to find buyers about 35% of the 10 year bonds offering a 1.98% coupon that they were trying to sell.

There are plenty of articles in the papers about how this signals the end of the Euro forever and it shows that the market for all European debt is falling apart. To use a slightly arcane piece of economic jargon, this analysis is ‘Grade 1 twaddle, balderdash, guff and bunkum’ (please stop me if this is too technical).

Just think about this for a minute. The German Government is trying to borrow money over 10 years at a fixed rate of 1.98% a year. That means (in slightly simplified terms) if you lend them EUR100, you will get a ‘coupon’ (interest payment) of EUR1.98 and after 10 years get your EUR100 back.

However, German inflation is running at either 2.49% or 2.85% depending which measure you prefer (link). That means that the German Government is effectively expecting people to pay them money for the privilege of lending to them! The amazing bit for me is that they found so many takers, not that they failed to sell everything.

Don’t get me wrong, the Eurozone as a whole is facing a raft of problems including how to continue to fund their deficits. However, this is neither a symptom nor a cause of that.

1.98% Sounds like bargain compared to 32% greece and 7% spain/italy.

I take your point about inflation about half what uk inflation is but

maybe the people lending are from outside germany?
As it does seem mad that people pay them to lend.

From what I have seen last month is germans have their own money they just dont like spending it hence why they want the chinese to baiul out eurozone but they said no you need to sort amongst yourselves.

I sometimes do think that they did very well out of euro and others did badly that they should share the burden if they serious about keeping the euro and eurozone together,

Maybe the lenders not impressed by merkels lack of action as bonds tends to be linked to confidence and having a clear plan.

Generali

Mrs_Bones wrote: »

I thought Germany was the country with all the money that was expected to lend to those other Eurozone countries in trouble. How are they going to do that if they have to borrow for themselves?

Germany (and to some extent France too) is the country with the credit rating and thus the ability to guarantee the debt of others.

Germany is running a deficit and even if she wasn't, as old bonds 'expire' (mature in the jargon) she will need to borrow to pay off the old debt.

MacMickster

Generali wrote: »

Germany (and to some extent France too) is the country with the credit rating and thus the ability to guarantee the debt of others.

Germany is running a deficit and even if she wasn't, as old bonds 'expire' (mature in the jargon) she will need to borrow to pay off the old debt.

If Germany are struggling to get takers for their bonds, then France will be seriously worried at the moment.

Generali

MacMickster wrote: »

If Germany are struggling to get takers for their bonds, then France will be seriously worried at the moment.

Germany is struggling to borrow for 10 years at 1.98%. That's not the same thing as Germany struggling to borrow.

More usually, Germany borrows for 10 years at about 5-6%.

To use an analogy, it's rather like complaining that your discounted mortgage rate has come to an end and you can't find another at the same very cheap rate as market rates have risen. It doesn't mean that you can't borrow or that banks won't lend, it just means that you can't get the great deal you had before.

Mr_Mumble

Generali, I agree with the thrust of your argument but some of the reasoning is kinda flaky, e.g.

Generali wrote: »

German inflation is running at either 2.49% or 2.85% depending which measure you prefer (link). That means that the German Government is effectively expecting people to pay them money for the privilege of lending to them!

Bond holders are lending for the next ten years not the past year! The average inflation rate over the next decade is of import here, the inflation rate last year - which included some reasonably strong growth - does not. Considering your penchant for talking of 'deflation' in tough times it seems odd that you're using this argument given the expectations are for, at best, a flat-lining in eurozone GDP in the coming years.

Ultimately the German government only getting 0.6481x coverage on a bund auction is not the sign of a healthy debt market! Yep, they don't have a problem funding themselves at a higher yield for now but this was a warning from the market of what silly talk of a eurobond would bring.

ECB Vice President Vitor Manuel Ribeiro Constâncio said the auction had failed "for technical reasons." He noted a crucial distinction with the failed auctions of other countries in recent months, saying "it doesn't raise any concerns about the capacity of Germany to finance itself."

But investors also drew attention to the fact that the auction coincided with the publication of proposals from the European Commission for the joint issuance of bonds by euro-zone countries, something that could radically change the dynamics of the entire debt crisis by giving an effective German commitment to underwrite at least a part of the rest of the euro zone's debts.

...

"The market perception is that Germany's credit quality has deteriorated," said Andrew Roberts, head of European rates strategy at Royal Bank of Scotland, who recommends gilts. "The worse the crisis gets...[the more] people will start to question who's going to pay the bill at the end of the meal," he said. "All roads lead to Germany."

Berlin has consistently rejected the introduction of so-called euro bonds, which would force it to share the default risk of other euro members and push up Germany's own borrowing costs. But many observers say common debt issuance may be the only way Germany can keep the euro zone from breaking apart.

PS. being an utter pedant the coupon rate on these bunds was 2.00%, the average auction yield was 1.98% (i.e. most buyers will have paid just over 100 Euros per bond).

Generali

Mr_Mumble wrote: »

Generali, I agree with the thrust of your argument but some of the reasoning is kinda flaky, e.g.
Bond holders are lending for the next ten years not the past year! The average inflation rate over the next decade is of import here, the inflation rate last year - which included some reasonably strong growth - does not. Considering your penchant for talking of 'deflation' in tough times it seems odd that you're using this argument given the expectations are for, at best, a flat-lining in eurozone GDP in the coming years.

Ultimately the German government only getting 0.6481x coverage on a bund auction is not the sign of a healthy debt market! Yep, they don't have a problem funding themselves at a higher yield for now but this was a warning from the market of what silly talk of a eurobond would bring.

ECB Vice President Vitor Manuel Ribeiro Constâncio said the auction had failed "for technical reasons." He noted a crucial distinction with the failed auctions of other countries in recent months, saying "it doesn't raise any concerns about the capacity of Germany to finance itself."

But investors also drew attention to the fact that the auction coincided with the publication of proposals from the European Commission for the joint issuance of bonds by euro-zone countries, something that could radically change the dynamics of the entire debt crisis by giving an effective German commitment to underwrite at least a part of the rest of the euro zone's debts.

...

"The market perception is that Germany's credit quality has deteriorated," said Andrew Roberts, head of European rates strategy at Royal Bank of Scotland, who recommends gilts. "The worse the crisis gets...[the more] people will start to question who's going to pay the bill at the end of the meal," he said. "All roads lead to Germany."

Berlin has consistently rejected the introduction of so-called euro bonds, which would force it to share the default risk of other euro members and push up Germany's own borrowing costs. But many observers say common debt issuance may be the only way Germany can keep the euro zone from breaking apart.

PS. being an utter pedant the coupon rate on these bunds was 2.00%, the average auction yield was 1.98% (i.e. most buyers will have paid just over 100 Euros per bond).

All good points but to assume deflation in what has been an inflationary environment in pretty much all of Western Europe and the USA since WW2 would probably be foolish.

I take your point about the inflation figures being backward looking and it is correct by definition.

I think the point remains that it is optimistic of the German Government to believe that they can borrow money for 10 years at 1.98 or 2%. But then if I could borrow a couple of billion at that price, I would!

IronWolf

Just because it's a real terms loss doesn't mean its not a sensible investment.

The "risk free" interest rates all around the world are rock bottom, but its still a better alternative to the only other risk free asset - cash.

ruggedtoast

I'm growing weary of all these Eurozone about to collapse reports. It should just get on it with and go or shut up. Its been going on for ages now.

Still, I'll bet they will open Scotland with open arms, thats just what they need, another small socialist country with every intention of spending far more than they earn on the public sector.

chewmylegoff

Generali wrote: »

But then if I could borrow a couple of billion at that price, I would!

but what would you do with it? after you've filled your ISA and paid £500 a month into regular savers, you're still going to have quite a lot left over.

in order to invest in something which will pay the returns which match the interest payments due on your debt, you will need buy bonds. suggest you go for euro denominated ones to avoid taking on foreign exchange risk. may be some nice greek bonds. what can possibly go wrong.