Opportunities in the bond markets

I was taken by surprise following the announcement of the allocation policy for the MGS 3% 2040. Investors were allocated only €10,000 per applicant plus an additional 12% of the remaining unallocated balance. Then again, the signs are on the wall on how best to make money at the moment.

Mario Draghi and Janet Yellen are creating an opportunity in the bond market that investors haven’t seen for a quarter century. Draghi may make it even more attractive when the European Central Bank meets on Thursday. The ECB President is polishing his plan to fight deflation by buying government debt in the euro region. Draghi said in January the purchases would start this month. Meanwhile, Federal Reserve Chair Yellen is considering raising interest rates. The result is that U.S. 10-year notes yield 2.13 percent, versus 0.36 percent in Germany. The last time the difference was as much as 177 basis points was May 1989.

The ECB is joining officials from nations such as Canada, Russia, China and Singapore who are seeking to support their economies and keep prices from falling. As more central banks around the world continue with easing policies, this will make Treasuries more attractive, especially when the spread between Europe and the U.S. is widening. This is also creating a secondary effect on the currency markets, with a USD which is rapidly appreciating. The EURUSD has fallen to $1.11 as of this writing, reaching recent historic lows.

The spread between shorter maturities is also widening. U.S. two-year notes yielded 0.68 percent, compared with minus 0.21 percent for their German counterparts. The U.S. premium of 89 basis points is the most in eight years. While the ECB is sending yields plunging in the euro area, investors are preparing for the Fed to increase its benchmark as the U.S. economy improves. The Bank of England also meets Thursday. Projections are for policy makers will increase U.K. borrowing costs by the end of the first quarter of 2016.

There is a strong possibility that German 10-year bunds will follow shorter maturities in the nation, pushing yields to negative levels. Subsequently, yields on Malta government stocks are also expected to continue to be put under pressure, with an opportunity for handsome capital gains in the short term.

India lowers interest rate

Reserve Bank of India Governor Raghuram Rajan cut interest rates in an unscheduled move days after the government agreed for the first time to give the central bank a legal mandate to target inflation. Rajan, citing weakness in Asia’s third-largest economy, lowered the benchmark repurchase rate by a quarter percentage point to 7.5 percent, the second such move this year.

India’s benchmark stock index, which climbed to a record soon after the rate cut and the rupee was little changed at 61.93 a dollar and the yield on the 10-year sovereign bond fell to a two-month low of 7.67 percent.

RBS to cut jobs as planned

Royal Bank of Scotland Group Plc will eliminate as many as 14,000 investment-banking jobs as part of a previously announced reorganization, the Financial Times reported. The reductions would amount to most of that business’s workforce, with “a large proportion” occurring in the U.S. and Asia, the newspaper said, citing the people it didn’t identify. Chief Financial Officer Ewen Stevenson said last month that the firm had begun a global overhaul of the investment bank.

The previously announced reorganization will make RBS “a smaller, more focused bank,” Sarah Lukashok, a spokeswoman for the lender, said in an e-mailed statement. In the U.S., the corporate and institutional bank will offer rates and currencies services, as well as “materially reduced” corporate-lending, debt-capital-markets and syndicate capability for companies and financial firms from the bank’s home region, she said. “These changes will see us become a stronger, safer and more sustainable business, more aligned to the needs of our core customers in the U.K. and Western Europe,” Lukashok said.