Long term real interest rates turned negative in all euro area countries
Market expectations of the short-term euro interest rate changed from mid-April to mid-August 2019, a month before the September 12 monetary policy meeting of the ECB Governing Council.
The reasons for this huge shift in expectations (even for 2049) during the four months between April and August is unknown; I have some doubts whether the worsening of the near-term global outlook would justify such a big fall in expected interest rates in 30 years’ time. The fall in inflation expectations cannot explain [it] either, because the market-based inflationary expectations of the euro area over the next ten years have fallen just by 0.25 percentage points from 1.23% in April to 0.98% in September, which is much smaller than the fall in the expected average short-term interest rate over the next ten years.
Long term real interest rates fell below zero in all euro area countries
By: Zsolt Darvas – Bruegel
Is the European financial market flashing red?
Desmond Lachman argues that European credit risk is badly mispriced for the following reasons:
- Even Greece, a country with a public-debt-to-GDP ratio of 180 percent and which is no stranger to sovereign debt default, can now place some of its bonds in the market at negative interest rates;
- A number of high-yield corporate bond issuers too are managing to place their bonds at negative interest rates;
- The Italian government is now able to borrow for 10 years at a record low of 0.8 percent, or at around half the corresponding rate at which the US government can raise money.
European financial market red flags
By: Desmond Lachman – American Enterprise Institute
The whole of the German sovereign yield curve is in negative territory
Paret and Weber estimate the “Bund premium” as the difference in convenience yields between other sovereign safe assets and German government bonds adjusted for sovereign credit risk, liquidity and swap market frictions. They find that:
- There has been an increase in the “Bund premium” and therefore the specialness of German bonds post crisis. This is true vis-àvis the other G11 currency countries overall, the euro area countries and also vis-à-vis the U.S.;
- The projected decrease in German government debt supply compared to other large economies will put further downward pressure on German bonds;
- The Bund premium is expected to be much higher in a scenario of continued ECB QE.
German Bond Yields and Debt Supply: Is There a “Bund Premium”?
Authors: Anne-Charlotte Paret, Anke Weber
From: IMF
