Thursday, 19 July 2018

The Bund leading the Bund

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  • Peters 475px June 2014

Anthony Peters on the folly of blind faith in ECB bond buying.

The word “rout” was being bandied about with gay abandon as 10-year Bund yields yesterday sailed back north of 0.50% which took the benchmark Bund 0.5% 2025 below its issue price of 99.82 to an intraday low of 99.70 which in turn finally wiped out all the gains of what had so far been another banner year for bonds. How the mighty fall.

That yields at such low levels were never fundamentally justified was news to nobody. The rally, so it appeared, was founded on the assumption that there was another idiot who would pay more for a bond than the previous idiot, himself paying up in the expectation that he too would surely find an even greater idiot to buy the bonds off him. The fact was that all those idiots blithely assumed that the idiot in chief was going to be the ECB and that, whatever the price, the buyer of last resort would never let the market down.

The bear steepening will be hurting all and sundry but the biggest loser will be the ECB itself which will be struggling to find any bonds at all which it has purchased since it began its QE programme which are not showing a loss. If the purpose of QE was, as stated, to bring down the cost of borrowing, then it is as, as of now, nothing but an abject and costly failure. Central banks depend on credibility and although it has as yet not been broadly discussed – people are still too busy mopping up the blood – that of the European Central Bank will have taken an absolute spanking.

Since the eurozone crisis erupted, the safe harbour in the midst of the stormy sea has been the ECB. Faith in it and in the wisdom of Saint Mario has been neigh-on religious and I am sure that it will take some time for it to sink in that this esteemed organisation is not in control. That is, unless European bonds enjoy a sharp and sudden recovery. If not, the ECB and its QE programme will be seen by all those who have seen their performance go up in smoke as just another incarnation of the Pied Piper of Hamelin.

Widespread destruction

If you reckon Bunds have had a stinker, spare a thought for the poor peripherals such as Italy and Spain which have not been hit by a truck but by a fully laden train. Since its low yield on March 11th, the yield on the benchmark Italian 10-year has risen from 1.14% to 1.86% as of this morning. Over the same period, the Spanish benchmark has risen from the same 1.14% to 1.83%. As recently as Tuesday last week it was still just below 1.30%. Splat!

Equity markets are also hurting with the Dow back within no more than 100 points of returning to negative territory, year to date and the mighty Dax, having lost 2.5% in value yesterday alone, is now over 1,000 points or 8.5% off its record high of April 10th. I could go on.

Whether this is anything more than an interim wobble is hard to assess and I, with my inglorious personal track record, should be the last one to opine on whether or not this is a screaming buy or the last chance to get out. If, however, the ECB’s credibility really does start to be questioned, underlying recovery or not, I know which way I’d position. In that case and in the cause of honesty, I’d recommend that you go the other way.

On the UK election and red lines

Here in the UK, we are into the last day of campaigning ahead of tomorrow’s General Election. Consensus is that there will be no consensus and that there will be a hung Parliament. I know that there are many out there who would rather see a hanged Parliament but that is for another day.

Although the British aren’t good at ideology, we have a political culture and electoral tradition which is built around party manifestos and red lines. This makes the parties and their policies deeply inflexible and thus not predestined to forming coalitions. The electoral disaster which is expected to befall the Liberal Democrats is largely being put down to their having broken promises made at the last election, not least of all the one concerning tuition fees in tertiary education.

Government and opposition are used to opposing each other in everything. If one calls black, the other calls white. If one says yes, the other says no. In a system designed around binary arguments, a multi-faceted political landscape looks leaden footed rather than fresh and dynamic.

There was a time when the Tories seemingly focused on how money could best be made and Labour on how it could best be spent. Looking at the way both parties have needed up promising to outspend each other on health and education while conveniently forgetting that the first role of governments is the defence of the realm and accounting for the straitjacket of the election manifestos, we’re in for a rum old time, irrespective of who wins tomorrow. How equally corseted minor parties will fit in is another matter entirely.

What a desperate misery to see them falling over each other when it comes to promising how they are going to “invest” the £200 million odd which the government, whichever it might be, will receive from Deutsche Bank’s Libor fixing fine while not dedicating a single word to how they will deal with the truly significant loss of revenue they will suffer if, as and when HSBC packs up and naffs off back to Hong Kong, whence it originates. I fear that when all is said and done, when the votes are counted and the government formed, the only loser will be the tax-paying citizen who will, without any means of defence, be called upon to minimise the number of electoral lies and half-truths by making as many of the promises as possible come true.

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