The Ally Pally Analyst

Central Banks have been pretending its Halloween for way too long with their low or negative interest rates; scary world, scary things a happening so have some free candy. The Global Financial Crisis and Sovereign Debt Crisis was scary but they are over now. Shouldn’t the free candy and negative and low interest rates be over now too? They should be but they aren’t and there is minimal chance of that changing. The challenge now is to figure out how to survive negative interest rates in the meantime.

Today is the day between Halloween and Dia de Muertos. Two holidays kind of in cahoots but not really and both looking backward rather than forward. While I enjoy free candy and also celebrating dead friends and family, I also want to look forward. Forward to a time when central banks are in the position to raise interest rates. How are the three things related you ask? I love Halloween, Dia de Muertos, and Central banks, and I’m the author, that’s how.

Today is also Christine Lagarde’s first day in office and Mark Carney only has 3 months left in his mandate. Despite those changes, I don’t think central bank policy in either the UK or the EU will change much. As much as I love central banks, the time has come for the fiscal side to take the lead. This is as scary as Halloween given the state of politics but unfortunately, we have few options.

I wrote previously about how I think the environment is ripe for Germany and the EU, in general, to move away from its balanced budget mania and focus on true growth-enhancing fiscal policy. I still believe this is the case but it will not be an overnight development. The future in the UK is less transparent given its Brexit issues. However, I still view it as a rather safe bet to assume the BoE isn’t hiking rates anytime soon.

In the meantime, what’s a European sovereign debt investor to do? Where is one to turn to when its negative rates as far as the eye can see? Do I as an analyst, stick with the fundamental analysis that has guided me well so far? Or do I lean more on technical aspects supported by the view that the bond rally, supported by declining liquidity, forced holding and no foreseeable movement in interest rates continues to have legs?

Relying solely on one or the other is like going into the basement to check the fuse box after all your friends have been murdered in your living room. It is unlikely to end well.

As with any challenging environment, you have to combine the two aspects. No one, unless it is in your mandate, forces you to hold a bond to maturity. People all the time make money selling bonds before their maturities. Don’t tell me you bought Austrian centuries bonds and you are prepping notes for the analysts who fill your spot after retirement and death. Though they could check in with you on Dia de Muertos and let you know how the bond is doing. So let’s cut the bruhaha about bonds and capital gains.

There is also currency hedging and futures to look at in terms of opportunities in a negative world. This is the beauty of combing a fundamental analyst, a portfolio manager, and a good trader because they can explore the fundamental and the technical in a market environment that demands both. That’s how we will survive all the free candy and avoid having to go into the basement.

Feel free to file under HAPPY HALLOWEEN, ALMOST EVERYTHING IS RIDING ON YOU, CHRISTINE

Two things have changed that could trigger the death of the Great German Schwarze Null, the county’s self-defeating budget policy. That death would herald a new chapter of German leadership as the country implemented and therefore, blessed, fiscal expansionary policy in Europe and provided the fiscal heave to monetary policy’s continuing efforts to boost European growth. 

1. Germany is no longer the strongest in the EU, either economically or politically (internally or externally).

2. Christine Lagarde is about to take over at the ECB. 

This new environment creates the space and impetus for Chancellor Merkel to deviate from the well-trodden path of Germanic fiscal restraint ahead of her retirement. 

Chancellor Merkel led Europe through the sovereign debt crisis. She walked on water domestically as well. Since her brave statement welcoming Syrian asylum-seekers to Germany, her popularity has waned as has Germany’s economic prowess. That economic weakness coupled with her declining popularity and an already telegraphed exit creates the space for a change to fiscal policy.  

Last week’s government announcement of a EUR54 bln spending package to reduce emissions is the first step. While it won’t save the Polar Bears from day one, it does restore some climate change credibility to the administration which should be helpful in the polls. It is not a full stimulus program by any stretch either but baby steps! We are talking about Germany and the Schwarze Null! They bake cakes and take photos with the Schwarze Null. 

Even though Germany stares down the barrel of a technical recession with 3Q2019 numbers anticipated to be negative after the contraction in 2Q2019, it is still too early for the Germans to throw stimulus at the problem. But what if you had a very savvy head of the ECB who has spent her career talking politicians into doing things they don’t necessarily want to do?

Enter Lagarde! Draghi has laid the extensive monetary policy groundwork for her to focus on her strength: political wrangling. If anyone can talk the Germans into thinking twice about the oppressive zero they’ve yoked themselves to, it will be her.
If the German administration acts quickly, it may be able to strengthen its climate change credentials, support growth and knock the wind out of the AfD. But that is a tall order.

Technically though, there is room. The Schwarze Null is not enshrined in law. The debt brake is but German officials are already speaking about using off-balance sheet vehicles to manage that. I wonder where they got the idea?

German fiscal expansion would be positive for all European assets. It will not drag Bunds out of negative territory, but it would contribute to growth and inflation. There is a line that connects today’s fiscal stimulus by Germany with an exit for the extraordinary monetary policy at the ECB.

That should be sellable to German voters and investors.

Feel free to file under OKTOBERFEST WILL BE EVEN BETTER NEXT YEAR

Everyone has a blonde in their history they’d like to forget. Will Boris fall into that regrettable blonde category as well? 

The political scene in the UK will be significantly different with Boris in No 10. It’s going to be louder and appear more chaotic than under Theresa May but don’t buy into the show, Boris has a plan. Or at least a playbook. 

What did markets do with the less-than-surprising outcome yesterday?  Looks like volume for Sterling as quoted by CME was in the upper bounds of recently activity but not as high 3 other days in the last month. GBPUSD at 1.24 this morning isn’t showing any signs of giving up the ghost and continues to suggest the market is under pricing the risk of no deal.

I’m not going to pretend I understand equities in the current global environment but the FTSE 100 was down yesterday and looks down further today but with some good padding to keep performance positive. On to something I do understand though that doesn’t suggest the pricing is logical: the UK sold 10 YR paper yesterday at 0.789% yield. Safe haven, yes but safe haven in the country with issues? Holding and investing sterling isn’t the most fun place to be right now.

Anywho.

Back to the Boris’s plan. Rule number one at the bazaar is you’ve got to be willing to walk away. Boris knows that and while the stakes are higher than the scoring the ‘authentic’ tea set on your holiday to Istanbul, Boris is playing the same game. He wants everyone in Brussels to believe the UK will walk away with no deal. He’s crazy enough to pull off this high stakes strategy. 

Unfortunately he’s not savvy enough to avoid risking the UK’s economic future.  There’s no amount of savvy-ness that can paint any sort of realistic post-brexit / no deal game plan where there’s any hope of economic growth. The UK is staring down the barrel of recession regardless of the outcome, what market participants are trying to figure out now is the magnitude. 

Does the British blonde deepen or mitigate that magnitude? A no deal exit will be bad and it is likely. Maybe Boris gets some concessions from the EU. You should never count Brussels out or bet the house on what they’ve previously declared. Things are always fixed in Brussels until they aren’t. However, it is hard to imagine a scenario where Brussels gives enough to silence Brexiteers and their screams for No Deal. 

Boris will crash the UK out the EU. He’ll leave that tea set in the bazaar because he couldn’t get it for nothing. And the UK’s outlook will deteriorate because of it. 

Thank goodness we’ve got global central banks cutting to smooth all this disruption.  Right?

File this under WE NEED TO STOP RELYING ON THE CENTRAL BANKS

Osaka looks like a fab place to visit.  I was there as a child but have zero memory of it.  I don’t think many other people will remember Osaka beyond this week’s G20 meeting either, at least not for Trade War announcements. The Obachan are giving it everything they’ve got to raise Osaka’s profile but it won’t be known for where trade wars were avoided. 

There is too much to gain politically for both leaders to cut this tit-for-tat short at the G20 meeting.  Trump is trying to figure out if Trump ‘winning’ against China can eclipse an economic slowdown caused by the tariffs at the polls.  One couldn’t fault him for believing that any economic fallout from his ‘win’ against China and free trade will be dealt with by the Fed with a nice rate cut. 

The Fed could stay on hold in anticipation of a reversal of the already existing bad data if we got a very significant declaration in Japan at the G20 meetings.  But 1) we aren’t getting any declaration and 2) the Fed is all set to cut rates. With the data already looking weak, the Fed will cut rates in July and be buoyed by the lack of any concrete trade war resolution at the G20 meetings.    Too bad it won’t solve any real problems. While I love a central bank announcement on a rate move, I don’t love that they seem a bit ineffective nowadays.

It was great hearing from Draghi at Sintra (I have been there and do remember it) though I don’t think anything the ECB can do at this point will help growth.  Unless all of the sudden negative rates for bunds somehow translates into expansionary policies from the Germans.  That is even more unlikely than a Trump and Xi announcement at the G20. 

Xi and Trump have to be savvy about pushing the trade war too far.  If the two countries become entrenched in their opposition and the economy takes too much of a beating, lower rates in an already firmly anchored low-rates world isn’t going to be the stimulus it once was.  A Fed cut now and even again in the short term, won’t be able to cushion the economic blows on the electorate if the trade war intensifies.

While we watch these G20 meetings to see if these two leaders can balance their political desires with everyone else’s desire for a robust global economy, it seems that markets are experiencing an interesting balance with both risk-off and risk-on coming to bare.   Bonds have come screaming in after the ECB and Fed turned VERY dovish and Equities are still at highs.  Both are probably overdone.  The market seems stuck in a mindset that rate cuts will solve all problems and the arguments in support of that view are getting increasingly tenuous. 

Where do people go from here?  I think the Hunt for Yield comes firmly back into focus.  For EM and HY in general.  But HY credit does not look like a fab place to visit for me.  I’ll stick with what I know and what I can remember: the sovereigns and be a sovereign obachan.

ありがとう

Feel free to file under: 私は学校で日本語を勉強しました

Hard to focus on just the EU parliament elections while I sip my tea here in London but I will try because the future of the ECB depends on it.  All that is Theresa May, Brexit and the Tory leadership contest can be left for another post. Boris Johnson himself requires his very own missive.  The EU parliament elections have confirmed that no one is happy with the status quo but that the alternatives aren’t a screaming buy either.  Thank goodness we’ve still got the sensible ECB to take care of everything.  Or do we??

The EU Parliamentary elections showed us there is still plenty of pro-EU sentiment, but we are a long way from a stateless continent.  Domestic stories did dominate Italy, Greece and France but there was no continent-wide rejection of the EU and the Euro.

The voting in Italy suggests that coalition government will not grow much older before Salvini takes The League out of its partnership with M5S.  That will push bond yields up higher as Salvini is gunning for another fight over the deficit.  He’ll back down eventually so may provide a buying opportunity. 

I’m not anymore worried about France, Hungary or Poland than I was before the EU parliamentary elections which is to say not a lot.  I am more intrigued with Greece having semi-forgotten about the country in the past few years.  Though I might be late to that game since yields have already rallied in anticipation of the called election knocking Syriza out of power.

Now the voters are done, we get to watch politicians start the horse-trading.  It would be just a Europhile thing if the ECB job wasn’t at play.  The results show us the electorate is fed up with the status quo but doesn’t quiet have the stomach for what extreme parties are selling.  Yet.  I think the politicians might be cued in on this now.  This round of job appointments will take place in the vacuum left by a weakened and departing Merkel/Germany and where politicians know that their future isn’t as secure. Germany will struggle to place any countrymen in a top spot.

Growth has been stronger in the EU;  4Q2019 reached 0.4% up from 0.2% in 1Q2019.  Unemployment ticked down to 7.7% and inflation is ticking up, reaching 1.7% in April.  The ECB stopped a fair bit of its accommodative measures but is still quite the distance from raising rates.  The bank still requires a creative thinker who is well supported by EU leaders across the political spectrum to help foster an environment where Europe, despite its politicians, can thrive. 

Does Jens Weidmann, François Villeroy de Galhau, Benoît Cœuré, Olli Rehn or Erkki Liikanen fit this description?  I think Jens is out.  Full disclosure, on Thursday morning I thought Theresa May wasn’t going anywhere.  The Fins might have the outside edge and Erkki Liikanen seems to be best positioned.   I think the market would be happy with anyone but Jens.  The rest have continuity written all over them.  The process, not the final appointment, will be the source of volatility.  Markets are fragile with the US- China trade crap going on and there’s not a lot of faith in European growth or institutions.  It is a good thing that the UK looks so unstable or Europe might be viewed as a total basket case.

Feel free to file under EURO HAS A FLOOR AND IT ISN’T MOVING

I love the quote buy when there’s blood in the streets as one to frame my investing style.  It might sound a little too 80s revolution despite it actually being attributed to Baron Rothschild after the Battle of Waterloo but if you don’t take it literally, it is still good. Especially if you know what the next lines of the quote are purported to be.

While it is held up as the mantra for contrarian investing, I interpret it as reminder that even if you don’t like the fundamentals, there can be a price that makes things attractive.

BUT

Can we think about EM like that right now?  Does cheap lira, cheap peso, cheap rand make things ok despite the obvious challenges? Do parallel governments sitting on the eve of either a painful rebirth or a painful stalemate make Venezuela attractive?

Yesterday, Colby Smith in the FT wrote about the possibility of a Currency Crisis Redux citing Turkey and Argentina’s vulnerabilities as highlighted by an Oxford Economics article by Evghenia Sleptsova.  The rest of the vulnerable countries aren’t a surprise either:  Russia, South Africa and Ukraine.

Many a year ago I doubled down on Ukraine as the USD bonds and the currency fell.  I thought the story was fundamentally solid, the government just needed time and valuations could only get better and I bought more on the way down.  Interesting lesson learned there:  sometimes the bottom isn’t the bottom!  Not most original statement however it is worth repeating because I am more original than the masses in that I now take efforts not to repeat that mistake.

So where’s the blood to be found in a world of slowing China and a dovish Fed and a still strong looking USD? 

Overall, it is about taking advantage of short-term rates while neutralizing the FX risk and looking to add off-benchmark or more obscure EM sovereign credit.  This includes short term exposure to those beat-up countries and finding the ones that are beat-up and not making the front page of the press.  

Zambia, Kenya, Uruguay, Belize are my first stops on things that aren’t on the front page but might be of interest.

Feel free to file under: NEED TO DO WORK NOW THAT THE BLOOD HAS BEEN FOUND

Recep Tayyip  Erdogan is leading Turkey down a path that discourages investors, weakens intuitions and toys with sensitive geopolitical balances in volatile region for his own aggrandizement.  He is doing this after consolidating power through the constitutional referendum in 2017 and neutering the opposition through arrests and detentions post the July 2016 attempted coup.

He is also helping the CHP and the new National Alliance form a viable alternative to his rule. Nothing like common enemies and a bad economy to foster strength and cohesion in the opposition.  You’d think Brexit would do the same for British political parties but that is a firm NO.  We can discuss that later.

The parallels between the young Erdogan fighting for his mayoral success in Istanbul in 1994 and today’s  Ekrem Imamoglu, member of the CHP and supported by the National Alliance in his mayoral bid, are delightful.   Even Imamoglu is relishing in the similarities and highlighting a photo where Erdogan and his defeated opponent raise hands together recognizing the result. 

Its like when your kid finds a photo of you drinking beer after you grounded them for getting drunk!

But in all seriousness, half of Turkey followers already have Imamoglu sleeping in the Presidential Palace. I think he’d go back to the Çankaya Mansion or at least campaign that he would. That all might be a bit premature.  Though he is doing a lot right in terms of being a bridge between the secular and the non-secular. 

Turkey has a long way to get back to the glory days of early Erdogan and there will have to be a lot of effort to undo the consolidation of power and weakening of institutions that Erdogan has put in place. Which begs the question; is this the bottom or is there more to come?

The AKP continues to contest the Istanbul mayoralship results which doesn’t paint their ability to let go of power in the best light.  How the authorities tried to pre-empt a run on the Lira also leaves a lot to be desired on market-friendly policies.

Will there be much confidence in whatever story son-in-law/ Finance Minister Berat Albayrak has to share when he starts his rounds next week to convince investors Turkey isn’t sliding further away from reality?

GDP growth is negative.  The country is in recession and the central bank has been fighting but not in the most orthodox ways.  Inflation is 20% and interest rates are 24%.  While inflation will likely turn down shortly given base effects the structural problems still remain.  And while it is everyone’s favourite tune to blame ‘markets’ or ‘foreigners’ it is your domestic population not wanting to hold domestic currency due to political risk. That problem lies squarely on the shoulders of the administration.  Feel free to ask Argentina. Or call the IMF, they’ll confirm the story!

But what is one to do?  Intuitions need technical bureaucrats with skills and independence.  There is nothing in Erdogan’s past that suggests this will be his new game plan.  I know past performance doesn’t guarantee future performance (shout out there to Compliance!) but it is hard to imagine an about face from Erdogan.  I think he’ll double down with no path change.

That means there is more pain for the lira, Turkish assets and unfortunately, the population.  Do you start a position  now and sell when maybe the market accepts Albayrak’s vision for the future or is the market a little too wise now about Erdogan’s delivery on growth?  I think it couldn’t hurt as there is still a ceiling to the currency and places to be active in Turkey.  But there is probably more ugly to come.

Feel free to file under WHY NOT GO TO DC NEXT WEEK? I HEAR THERE ARE SOME MEETINGS PLANNED

Italy is set to be the latest country and the first in the G7 to sign up for China’s Belt and Road Initiative (BRI).  That seems to upset quite a few folk. There is a lot of geopolitical noise in this story but likely minimal economic benefit.  It is more about the geopolitical ramifications and Soft Power than anything else.

Don’t underestimate Soft Power to get things done though, I’m a Fulbrighter so I should know.  BUT it won’t bring growth to Italy like some karmic redistribution of Chinese blessings for the PIGS countries in the Year of the Pig.

Full disclosure as well:  the Confucius Institute is lessening my son’s school’s budget deficit and sponsoring our trip to China!

The outlook for Italy’s economy doesn’t change much on the back BRI. This non-binding initiative is unlikely to spur actual growth in Italy.  Italy needs to address labour rigidities, weak banks on lending strikes and overall governance challenges. 

The BRI is also unlikely to move the needle for China.  I’m no China expert but that country’s profile is changing significantly.  Urbanization, cheap labour, trade surpluses are all things of the past.  The Chinese authorities are working overtime to reconcile what is needed to return the country to dynamic growth without sacrificing the political structure and possibly even tightening the reins.

But it does do a lot in the ole’ Soft Power side of the equation.  Italy’s own government isn’t 100% behind signing the BRI though that doesn’t differ from any other policy currently.  The unnatural alliance of the League and the 5 Star Movement isn’t stable and doesn’t have staying power.  This accentuates the weaknesses already in place in Italy.  The country is already in conflict with the EU over budgets and reforms and the lack of unity from the government just makes the country more of an outsider in the EU already.  It tried to tie its mast to Russia and block decisions new EU sanctions again the country.  It also was the only country to block the EU’s recognition of Venezuela’s Juan Guiado.  Now it is turning to China.

This serves China well as it is fully satisfies a variety of geopolitical aims and on the cheap side to boot.  It takes BRI up a notch from its current variety of frontier and emerging market participants.  (Though Italy is closer to EM than its G7 status might denote).  It strengthens the wedge between the EU and Italy.  Macron was just saying how China is threatening African countries’ sovereignty with bad investments and debt traps on his recent trip to the continent.  We won’t delve into the historical irony of that. 

It also shows that while the EU may support the US in its efforts to impart its view of how trading relationships should work, Italy isn’t towing the line.  The US warned Italy that it was letting in the wolf amongst the sheep with singing up to the BRI.  But since no one else is knocking on Italy’s door, the country is definitely going to let Italy in.  
And back to the wolf and sheep analogy.  Italy is the weak, injured sheep.  The EU has tried to do a lot to bring this little lamb back amongst the herd but for a variety of reasons, the Italians didn’t take advantage of fixing the banks which I view as the key point at which then a healthier system can help foster reform in labour markets and in government structures.  Italy remains weak and suspectable to the wolf or China depending on your point of view.  

Where does this Soft Power conversation turn into market pressure?  I have long said you should have sold Italy when the League and 5 Star Movement got together.  That was nothing but a bad omen for short term Italy.  The BRI doesn’t change this.  But if it motivates the EU or the US to actually pay special attention to Italy to get it to fall back in line, it might provide temporary support.  

We know the ECB is doing all it can.  The latest iteration of the TLTROs are good for Italian banks but will this change when Draghi leaves?  Will the Italian government collapse after the May European Parliament elections?  What is the cards for Italy after Brexit?  The BRI might accelerate or magnify the answers to these questions and that’s what will move markets. 

I don’t think 10 YR Italy looks cheap at 2.5 even though it might be slightly wide to historical.  I think there is weakness in the short term but a good institutional backstop in the EU so buy when the government collapses and keep adding until they form a government. 

• 

File that under I DON’T THINK SERIE A IS PLAYING IN BEIJING ANYTIME SOON

The Brexit fiasco is going to continue and the short- and medium-term outlook are bad for the UK.  And we are all dead in the long run[i] so I’ll skip over that analysis.  The vote today is likely to fail. The vote for a no-deal, if Prime Minister May still offers, is likely to pass and the UK crashes out of the EU and reverts to WTO agreements. That is bad for the short- and medium-term. And you now know my view on looking at the long run. Ditto if we get an extension on Article 50 and skip over the crash out. It is all bad.

Now I am firm in my belief that Brexit is bad (in case you were doubting) and I’m really only thinking about this from the perspective on my bank account and the majority of my peers (I’m British now, fancy fancy cuppa tea).  That being said, we got UK GDP growth today and while the 3-month average expanded at 0.2%, same as the 3 months to December, January in isolation outperformed.  It was the strongest monthly growth since December 2016.  Services, production, manufacturing and construction supported the growth.  That doesn’t really scream Panic at the Brexit, does it? But I don’t think it should be the hook upon which we hang all hopes that this journey away from a growth trajectory into the unknown will be worth it.

And it isn’t like the EU is some panacea; We just saw my favourite Central Banker (sorry Unreliable BF Carney but you’ve got some things to learn from Dreamy Draghi) push more stimulus into a moribund economy while the political fires continue to burn bright across the region.  The domestic political temperature is only set to rise as suddenly EU parliamentary elections are on everyone’s mind. 

I guess there comes a point that politicians can only deride the Brussels overlords so much in their own campaigns before the electorate gets interested in who they are actually sending to the European Parliament and what those people want to do and what they can do. Those elections are in May by the way.

We are fixated on happenings in Westminster today and that will extend to the no-deal vote and a possible extension of Article 50.  We should be fixated on GBPUSD and its pretty mutated reactions around Brexit. I can admit that today’s moves are larger but overall GBP hasn’t been as volatile as one would have expected.

But everyone has to be invested and maybe the alternatives to holding sterling are less attractive.  We know EUR has issues and China complicates JPY but maybe at 111.20 Yen starts to look attractive. Regardless of the domestic or regional story!  

My point here is, doubt those who say they can make sense of Brexit and tell you how it is going to end.  They aren’t telling you Ye Old Merry Truth. Understand everything has hair on it but take the hair you like and the pricing you like. If you need UK exposure look for something that will be around.  I’d recommend garden equipment since we might all go back to subsistence farming after Brexit and under Jeremy Corbyn but that’s only slightly helpful.  But seriously, there are options, but gilts might not be the best for the risk.

I like a hairy Europe where you get paid a bit more and there’s a bit more transparency around that hair.

I also like a blog post about Brexit and hair, it’s like being back around a bunch of PMs sensitive about going bald.  Brexit has enough hair for everyone, don’t worry.

Feel free to file under HAIRY BREXIT. It is going to end up being a large file!

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[i] The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. John Maynard Keynes

The ESM (European Stability Mechanism) is simultaneously the most boring and most exciting entity in Europe.  For some, it offers a route to the panacea of Eurobonds and the EU’s next step Ever Closer while to others it is just a rescue entity and another mechanism to assert Brussels domination over wayward faux European countries. 

The possibilities are endless, or so the saying goes, and that makes me closer to the panacea end of that spectrum.  There is such a wide gulf between what investors would like, what the electorate would like and even what politicians would like, depending on whether they are wearing their campaign-hat or their bond-issuance-hat, that while the possibilities may be endless so might be the road to Eurobonds.

So does the EU need a Eurobond? Depends on who you ask.

Investors:  Do they trust the EU and its collective actions?  If you really trust them, buy Greece and enjoy the pick up over bunds.  Not a lot of folks would sign up to that deal.  On a different note, I do think there is some value in Greece vs Italy if you could get around Greece governance issues and EU involvement.  I’ve got more faith in a Greek turnaround than an Italian one at the current juncture. 

But I can imagine that the market is looking for a rationale risk free asset ie Eurobond.  If you need high quality assets but puke a bit in your mouth every time you invest at negative yields, Eurobonds sound attractive.  But there are also a host of supras and agencies that are highly rated and offer some pick up to their sovereign counterparts.  If you aren’t looking at them and waiting for Eurobonds to offer you a safer but still yieldy asset, you might be in trouble.  And honestly if you are still complaining about negative yields, you have bigger problems. 

Also looks like 10 YR bunds are headed that way.  So buckle up.

Issuers:  What’s the EU’s incentive to get Eurobonds off the shelf?  Besides investor demand, not a lot.  Investor demand has driven a lot of financial product innovation, so I won’t pretend that isn’t a strong force, but I don’t think it is enough to get this one over the line.  But maybe it is more sophisticated than that. 

Eurobonds could drive support for the Euro and increase Euro usage.  It also creates a new option for both investors who want European exposure but also European financial institutions that need assets for the Liquidity coverage ration (LCR).   Would it be a back-door way to get the mutualized issuance than everyone right off the bat doesn’t want?

Paolo Savona, Italy’s minister for European affairs and recently designated chairman of the Italian financial markets’ authority did make a plea for them to come out of the ESM in the FT on 27 February. 

It is an interesting proposition, but it takes us squarely back to the lack of widespread enthusiasm for the concept so that it is unlikely the hard work needed to get the ESM in place to issue Eurobonds is forthcoming.  The ESM would have to be restructured to issue outside of an agreed assistance program, the ESM’s board, made up of finance ministers, would need some adjustment as there would seem to be a conflict of interest. 

The electorate is pushing back on Ever Closer and I can’t name on EU politician with any political capital to spend on the notion. 

But maybe there is an institution that can rally the folks.  The ECB has been the original creative thinking in the EU during crises and maybe even during the current calm they could bring some progress on Eurobonds. Seriously, Draghi can do anything.  Unfortunately, time is running out and the next iteration of the ECB might now be so adventurous.