Thursday, June 14, 2012

Germany’s Haven Status Fades As Crisis Bill Mounts: Euro Credit

Warren Mosler predicted this type of development in the market for German state debt securities a while back.  Coverage of the current situation at Bloomberg:
The discount Germany enjoys relative to the U.S. for 10- year borrowing has narrowed to the least in more than three months after Spain asked for a 100 billion-euro ($125 billion) lifeline for its banks on June 9. Traders of credit-default swaps also are buying protection against the risk of losses on German bonds, with the costs of insuring the nation’s debt surging to the most since January compared with similar contracts on U.S. debt.
Stumbling and bumbling (cue the "Yakety Sax" music) PIMCO shows up again and gets it all wrong as usual:
“We don’t want to have too much German interest-rate risk,” said Andrew Balls, head of European portfolio management at Pacific Investment Management Co. in London, which oversees the world’s biggest bond fund. “There is a big flight to quality premium embedded in German bonds. In the event that the euro zone gets better, these premiums will be unwound and German yields will have to rise. If the situation gets much worse, the money may leave the region all together. [Ed: Whaaaaat???] We favor cleaner dirty shirts, like gilts and Treasuries.”
This may be the first evidence of market participants starting to price in the fact that ALL of the nations in the Eurozone are not direct issuers of their own state currencies. We'll see how this continues to develop.


Tom Hickey said...

The vigilantes are going after Germany now. That could move the Bundesbank to take a more liberal position to protect the euro and shake off the vigilantes.

Anonymous said...

The first real conniption was the failed Bund auction and the associated spike in Bund yields. We are seeing it again now to a lesser extent (for the time being). My position has always been 'all roads lead to Germany'. It has to, and i see no reason to change that view. They will be forced to pay either way, bailout of peripherals (don't hold your breath) OR Euro break up.