Europe Is Running Out of Safe Assets
German debt has become massively overbid in cash and repo markets, underscoring the panic over the eurozone’s economic outlook
By Jon Sindreu
Investors have a problem: As the European Central Bank raises interest rates and the eurozone economy edges closer to a recession, they may not have enough places to hide.
Over the past week, markets have started to reflect the 0.75 percentage-point increase in interest rates that the ECB announced earlier in September.
The euro short-term rate, or €STR, which tracks the price at which banks lend unsecured money to each other overnight, closed Friday at 0.66%, compared with minus 0.083% before the rate increase.
Yet the rest of the money market hasn’t fully followed: Overnight borrowing using German collateral is still happening at rates close to zero.
For the common currency, this reflects a deep-seated problem that has been worsening all year: Unlike in the U.S., where a unified Treasury market acts as a haven for investors and a bedrock of monetary plumbing, there are 19 eurozone nations issuing sovereign debt.
The bonds of Germany and other Northern European nations do play a haven role, but these countries’ historic embrace of fiscal discipline means there are far less of them around than needed.
This situation is liable not only to disrupt trading and exacerbate market panics, but it also means that the ECB’s policy tightening might affect weaker countries more than those that are already economically robust.
Analysts often gauge the scarcity of sovereign debt by comparing its yield with that of interest-rate swap contracts sold by banks. +
Since markets don’t price a risk of default into German bonds and little into swaps—unlike bonds, swaps have no principal payment to default on—both instruments should act, particularly at shorter maturities, as guesses as to where the central bank will set interest rates in the future.
The spread between the two has been widening since rate setters turned hawkish in the fall of 2021, and it hit a record earlier this month, ICE Bank of America indexes show.
German paper trades on average close to a full percentage below rate expectations, as measured by swaps.
Despite fears of a snapback, it looks like the bonds will remain historically overbid.
By comparison, the Federal Reserve’s tightening of policy has reduced demand for Treasurys.
The same scarcity premium is visible in repo markets, a crucial piece of financial infrastructure where banks and asset managers use bonds as collateral for short-term borrowing.
There, the spread of German government-debt repo rates relative to ECB rates, as well as to other nations’ repo rates, has blown out, especially among trades that name specific—”special”— securities as collateral.
Officials are reacting: Last week, they temporarily removed the 0% remuneration for government deposits parked at the central bank, which had been motivating European treasurers to move money into bills or repos. +
Early indications are that this has eased the pressure on these assets, ECB Chief Economist Philip Lane said Wednesday.
However, this initial impact has faded, with investors again massively pushing down asking yields on German bills.
All in all, money markets are falling behind the ECB’s tightening cycle, far more so than in July.
It once again underscores why the eurozone needs a unified debt market, or at least more explicit mutualization by the ECB.
To be sure, officials’ promises to act in cases of extreme distress, while arbitrary, do seem to have had a positive effect: French bonds are also seeing outsize demand.
Even Italian debt is doing well in the repo market, though its spreads in cash markets keep widening in lockstep with those of risky corporate paper.
Messy eurozone politics aside, the fact these disruptions are flaring up now sends a concerning message: European markets are getting panicky.
0 comments:
Publicar un comentario