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European Bond Bloodbath – Worst January On Record Exposes Political Panic Across EU

With general elections scheduled in France, Germany and the Netherlands this year amid an increase in support for anti-euro rhetoric, European bonds from Germany to Greece saw yields surge in January. In fact, as Bloomberg notes, euro-region bonds handed investors the worst start to a year on record.

Worst. January. Ever. for European bonds…

 

Amid heightened political risk across the currency bloc and speculation the European Central Bank may bring its asset-purchase program to an abrupt halt in 2018, yields on French and Italian bonds climbed this week to their highest level relative to benchmark German debt since 2014. As Bloomberg reports, rising populism in the region’s biggest economies and speculation that the ECB’s stimulus plan may be nearing its endgame have clouded the horizon for bond investors, who have grown used to the central bank insulating euro-area securities from political tension. That’s seen yield spreads expand to levels unseen since quantitative easing began in 2015, and left analysts forecasting more pain if electoral risks materialize, particularly in light of the extreme market reactions seen in the wake of Donald Trump’s victory in the US.

The market’s move suggests Draghi’s insistence last year that policy makers weren’t considering scaling down stimulus and caution in January that underlying inflation showed “no convincing signs” of picking up is falling on deaf ears.

 

“The market is obviously seeing through this,” said Mark Nash, the head of global bonds at Old Mutual Global Investors, which oversees about $37 billion. It’s “seeing that quantitative easing has to come to an end soon.”

 

Peripheral bonds may come under further pressure should “markets continue to worry about the integrity of the euro zone,” London-based Nash said. Italy’s “banking system is obviously still impaired. Also, likely elections and political risks” may hurt the nation’s bonds. Nash said he shifted short positions to Italy and Spain from Germany.

 

The market’s “been raising the potential for a hard stop to quantitative easing at the end of this year if we do continue to get these rises in inflation and growth,” Nash said.

Perhaps even more concerning for the sustainability of the EU experiment is the soaring divergence between the two nations at the core of Europe…

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