One reason rates are lower than otherwise could be, the idea that in a breakup, if Germany goes back to the mark, bond holders will experience currency gains on the presumed appreciation vs the other euro members.

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      1. @WARREN MOSLER,

        It may be a hedge of sorts (of likelihood of capital return) … just a flight to safety like in Tsys. If the past 4 years (and JPM) have taught us anything, it’s that Texas hedges DO NOT work the same anymore, and are complete madness. Look, i think this thing blows and should never have existed anyway, but the Euro could unravel in so many different ways, full or partial, and the time lags could absolutely maul a so-called hedged trade. Just imagine one iteration : the Germans pull out unilaterally, leaving a depreciated Euro, and a massive stock of German debt denominated in Euro! The Germans don’t need to redenominate that debt. Stranger things have happened, especially the last 4-5 years.

  1. Warren/Mike,

    The market seems to be reflect that the Italian and Spanish bond issues are behind us or at least not so big.

    As I understood it, the ECB bond buying is keeping a lid on bond prices for now but can only do it for so long. I thought the buying is limited by bank fiduciary responsibilities and the money flowing in from the Private Sector Initiative. If so then it seems they will run out of money and I would expect a big drop in the market as panic increases.

    Is this in line with what you are thinking? I am only a hack learner (started by Mike Norman’s radio show and keeping up on your websites)

    1. @Mike Norman, Correct. Yet their board members can run out of member-country-backed courage. Bankers as a class are not known for taking any risk whatsoever – with their own privileges or paychecks.

  2. The 10Y swap rate is at 2.32%. On the other hand, the 10Y bund trades for less than 1.75%. There wasn’t any large demand in the last auction, with Bundesbank setting aside a large part to sell in the secondary market:

    My own view is that most financial institutions do not bid in the German auctions since the yields are much lower than their funding costs. Only German banks (with a lot of excess liquidity) could bid with a view in selling the bunds in the secondary market for a quick trade. Most of the demand should come from investors such as insurance companies, pension funds etc looking for a safe haven. Germany is basically manipulating the Euro bond market in order to gain extremely low borrowing rates.

    On a related note, it would be nice to see your thoughts on the latest T-Bill auctions by Italy and Spain. While the previous ones achieved yields lower than the corresponding Euribor rates, the last ones had yields much higher. That might mean that even short term bills are not considered risk-free or they just reflect the real funding costs for Italian and Spanish banks with the LTRO effect fading away.

  3. As far as I understood Paulson is betting against the Bund at the moment and is for the moment wrong.

    I think these German bonds are driven up by TINA status of Germany. Many people in ez do not know where to go. They think that with German bonds they will always be better of because Germany is the ‘motor’ of the ez. Many of these people are also afraid for USD etc. Do not forget that the mass still thinks that US debt levels are unsustainable.

  4. One reason rates are lower than otherwise could be, the idea that in a breakup, if Germany goes back to the mark, bond holders will experience currency gains on the presumed appreciation vs the other euro members


    Yes.. this is the reason for wich I have also Bund 1%

    but I hope in Draghi.. he in engulfing Bce with South States Bond with SMP and collateral for LTRO3.. and also in the EuroSystem there are 600 million of Credit (named Target2) of Bundesbank related to che Surplus of Commercial Balance of Germany with the South..
    in practice: in 2013 the Cost for Germany to exit will be too expensive for them. This is the reason for wich Bundesbank now is trying to accelerate the Exit of Germany : the Time Accumulate Credit and Work for Draghi to Enlarge Exit Cost for Germany. This will be the key in the next year to pus for EuroBond end/or Real Qeasying also x Bce like Fed..

    I close with a question : what do you think of Gold.. someone say that we are in the bubble and if the Global Crack Will Happen also this metal wil go in sell-off.. it’s a Real Fly To Quality for you ?

    1. gold is being supported by central bank buying. no telling how high they will drive the price, or how long their buying will last, and if buying stops, gold could drop to it’s marginal cost of production.

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