23 May 2014
Peripheral bond markets overvalued? – Danske Bank
FXStreet (Edinburgh) - Chief Analyst Kasper Kirkegaard at Danske Bank remarks the recent performance of the peripheral bond markets.
Key Quotes
“Specifically in the EUR money market it will be worth keeping an eye on the repayment announcement on the 3-yr LTRO, as the excess liquidity is once again approaching the EUR100bn level, where liquidity starts to become tight given the current fragmentation of the market”.
“The EONIA O/N fixed has already begun to rise, although we are more than one week away from month end”.
“It has been a very volatile week in the peripheral government bond markets and we have seen a significant short-term widening. This has raised the question whether the peripheral bonds were fundamentally overvalued and the spread compression has moved too far”.
“However, looking at the other credit spreads (other carry trades), there has been a modest spill-over effect. In our view the widening is due to the supply combined with limited redemptions and coupons – hence, the next cash flow in the EU government bond market has been veery negative for the past weeks. This is about to change, as there are redemptions coming from both Italy and Germany in the coming weeks”.
Key Quotes
“Specifically in the EUR money market it will be worth keeping an eye on the repayment announcement on the 3-yr LTRO, as the excess liquidity is once again approaching the EUR100bn level, where liquidity starts to become tight given the current fragmentation of the market”.
“The EONIA O/N fixed has already begun to rise, although we are more than one week away from month end”.
“It has been a very volatile week in the peripheral government bond markets and we have seen a significant short-term widening. This has raised the question whether the peripheral bonds were fundamentally overvalued and the spread compression has moved too far”.
“However, looking at the other credit spreads (other carry trades), there has been a modest spill-over effect. In our view the widening is due to the supply combined with limited redemptions and coupons – hence, the next cash flow in the EU government bond market has been veery negative for the past weeks. This is about to change, as there are redemptions coming from both Italy and Germany in the coming weeks”.