EUR USD (1.2485) Although yesterday saw Spanish bond yields increase to an unsettling 6.8 percent, it was the moderate increase in German bund yields that garnered attention. So far the eurozone crisis has only served to increase the spread between the peripheral bonds and those of the core European countries. Breaking of this trend actually indicates that as an increasing number of eurozone nations or their banks draw money from pan-European rescue vehicles and liabilities increase for core nations, investors will be prone to demand a premium for investing in hitherto ultra-safe assets. It is not surprising therefore that Finland has been lobbying for collateral in exchange for contribution to rescues, and Germany has been insisting that Spain should draw from the ESM, whose bonds enjoys preferred status in case of insolvency or default. In fact this German insistence on seniority of ESM funds, essentially undermines the sovereign nations capability to raise money from the markets. As scenarios emerge where Spain, Italy or for that matter France may find it increasingly difficult to tap bond markets cheaply, the bonds of the remaining nations are by proxy evolving into their eurobond avatars. For the politicians of core nations, saving their nation’s taxpayers from paying for rescues and at the same time resisting the concept of eurobonds has become a paradox. The euro’s current trading range is moderately narrower now and stretches between 1.2310 and 1.2710.
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Deutsche Bank