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Last week, the European Central Bank announced that it intends to speed up its’ Quantitative Easing purchasing programme before the summer drop off in volume. Yesterday, brokers in Malta were informed by officials at the Central Bank that they are willing to accept lower minimum volumes of trades, in line with the more aggressive stance that the ECB is trying to implement in the short term.
Demand and supply laws would dictate that the additional demand by the ECB before the summer could see a tightening in yields (increase in prices) assuming everything else remains constant. Therefore, investors would do well to hold onto their MGSs a while longer since the additional demand is expected to keep prices of sovereign bonds around Europe inflated. Investors need to heed caution however as over the summer months, namely July and August, liquidity and demand may dry up and sellers might face more of an issue to dispose of their bonds and may be forced to accept lower bids. As a result of the above, investors who are attempting to play the movements of the market should weigh this factor into their decision making process.
Another important force which has been shaping sovereign yields is the Greek drama that has been in the headlines for a while now. The latest news is that European leaders and the head of the International Monetary Fund agreed to step up the intensity of talks over Greece’s fate after an extraordinary meeting in Berlin about ways to avert a default. The top-level huddle which lasted late into the night at Germany’s government headquarters with Chancellor Angela Merkel, IMF chief Christine Lagarde, European Central Bank President Mario Draghi, French President Francois Hollande and European Commission President Jean-Claude Juncker in attendance. The goal was to hammer out an offer that Greece could consider in coming days. Following the meeting, Merkel’s office issued a statement saying that they “agreed that work must now be continued with greater intensity” and that “they have been in closest contact in recent days and want to remain so in the coming days, both among themselves and naturally also with the Greek government”.
No real development therefore from Greece. In my opinion it will be very difficult to find a sustainable solution which the Greek government will accept as the numbers simply don’t seem to add up. In the interests of the stability of the union the EU leaders are rightly not accepting default, however there is only so much that the Greek people can do and level of austerity they can tolerate, therefore sooner or later I expect some form of default or debt restructuring to take place.
My views seem to be shared by the broader market as the 10-year Greek government bond is trading at a yield of 11.2% compared with the 0.58% in Germany. Also any negative news emanating from Greece has seen a flight to quality, where yields on higher rated sovereign bonds like Germany and France have fallen, while lower rated bonds in Italy and Spain have risen. Should the situation in Greece deteriorate the potential impact on Maltese government bonds is questionable as the Malta yield curve calculations use a composite of benchmark European sovereign yield curves; however I personally wouldn’t stick around too long either way.
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