EC The European Bond Crash

 

 

The turmoil in the European bond market has demonstrated that the theory that interest rates will not rise and are in control of central banks is dead wrong. Despite the ECB’s policy to buy government debt to inject cash into the markets, one would think that the bonds would have a firmer floor of support. The price action is starting to show that the emperor has no clothes.

 

 

Our energy models clearly peaked in February both on the weekly and monthly levels. February was the highest monthly closing while intraday the high formed in April, but not on a sustainable level.

The heavy losses in the bunds are most significant for this was the market the European money was focused on assuming the euro would break the holder would get Deutsche marks. The euro is not going away easily because if it fails, tens of thousands of bureaucrats in Brussels will be out of work. Merkel wrongly thinks Germany needs the euro and is prepared to sacrifice her own country for a failed idea that should have stayed as a simple trade/economic union rather than a political one.

While the prices of government bonds dropped sharply sending yields upwards, the interest rate on German government bonds rose to just below the level of one percent. At the April high, German ten-year government bonds were traded with a yield of almost zero percent. This was clearly the peak in a bubble that suggested selling the bunds and buying 10 year U.S. Treasuries would be a great trade.

Some observers see the price declines as a result of the controversial monetary policy of the ECB. In the fight against an assessment by the ECB to low inflation, the central bank had launched a number of measures. Most recently, the ECB in March bought a total of billion in government bonds. They made the April high. The ECB proudly thought they conquered the market achieving the desired objective of an inflation rate of just under two percent.