The war has begun to enter the investment portfolio and has already caused its first victim on the financial markets: bonds. Yields exploded in the Eurozone to their highest levels in fifteen years. The 10-year Bund yield it rose to a maximum of 3.13% during yesterday’s session, never so high since 2011. The spread with Italy widened to 100 basis points, i.e. investors require 1% more to buy our ten-year BTp instead of their German counterparts. A month ago, they were satisfied with 0.65% more.
Bund yield boom with war
The government bonds issued by Germany are on the one hand reacting better than others to the geopolitical crisis, on the other they are also depreciating due to sharply rising inflation expectations. Over a decade-long time horizon, the market now expects average inflation rates of around 2.20% per year, while at the end of February it estimated around 1.85%.
This figure exceeds the 2% target of the European Central Bank, which not surprisingly warned this week that a rate rise against the high cost of living could also reach the board at the end of April.
The war is devastating the bond sector due to the violent repercussions on the oil market. Brent has returned above 100 dollars a barrel, with the prospect of a short-term cessation of the conflict between Iran on one side and the USA and Israel on the other becoming less and less day by day. The Strait of Hormuz remains blocked, no matter what President Donald Trump says, whose triumphalist and optimistic statements about the imminent end of tensions are no longer being listened to by investors.
The famous “TACO trade“ it’s no longer working, because the words don’t correspond to the facts.
Conflicting forces on German stocks
A 10-year Bund with such a generous yield could become an attractive opportunity for those wishing to enter the market now without taking on significant risks. It is true that the BTp offers 1% more for the same maturity, but in the face of a theoretically higher sovereign risk and which exposes it to a volatility higher. Two contrasting forces can act on German securities. On the one hand, the ECB has room to increase its purchases with Quantitative Easing. Germany weighs on the institute’s portfolio for much less than the theoretical share due to it, a fact that would authorize Frankfurt to favor its bonds in the phase of non-renewal of maturities.
On the other hand, a greater multi-year offer is expected. The Berlin government will spend more (and in deficit) on defense and public investmentswhich a year ago led to the first sharp rise in yields for Bunds, now accentuated by the ongoing war. This is the reason why the German market is performing “safe asset” halfway. It attracts capital seeking protection from the energy shock, but is also affected by changed macroeconomic fundamentals. Germany was for many years the only large economy with a public budget in surplus, while now it too is relying on debt to boost its growth after three years spent between recession and stagnation.
giuseppe.timpone@investireoggi.it
