Global bond markets in the last six month have been defined by monetary easing stance by central banks across the developed world. The central banks in the EU, the US, Japan and UK continued to expand their balance sheet through easing of monetary policies. The additional money created through these measures flown into bond markets thereby increasing the liquidity and pushing the yields to historically low levels.
Within EU, the bond yields were historically highest during the last quarter of 2011. This led ECB to initiative LTRO in two phases in December 2011 and February 2012, respectively. LTRO supported the banking system with cheap loans with a 3 years maturity. The total LTRO loans were approximately €1 tn. LTRO led to a rally in the bond market on account of declining risk premia coupled with liquidity. The effect of LTRO started to fade after the first half of 2012. Greece election failed to conclude a result after the first vote. In addition, negative signals started to arise from Spain, causing the yield on its bond to rise to historical levels. Spain was badly hit on account of its troubled banking systems. Concurrently, investors lost confident on Italy, the next in line, leading to higher yields on its bonds as well. ECB sensed the direness of situation, and then Mario Draghi came up with its commitment to do "whatever it takes to save EURO". The yields for Spain and Italy came down after this statement. Spain also received a €100 bn bailout package to support its fragile banking sector. This instilled further confidence in Eurozone. Yields for corporate issuers across the Eurozone benefited from this move, leading to record new issuances. In order to provide some concrete measures to support his words, Mario Draghi unveiled outright monetary transactions (OMTs). OMT stipulated that ECB will support the yields of country applying for a bailout to European stability mechanism (ESM), which was subsequently ratified by the German constitutional court. ECB also clarified that it would buy bonds at the near end of yield curve, i.e. within three years maturity. This ensured that monetary policy stays uniform across the Eurozone and issue of financial fragmentation is addressed properly. Meanwhile, the US came up with its QE3 to bring down its mortgage rates.
These measures on a combined basis have led to a rally across the Europe, making European high yield notes one of the best performers in terms of returns. With these measures in place and elections in Germany due in 2013 we do not expect any volatility in the Eurozone bond markets in the near term. In addition, efforts are underway to create a banking and fiscal union, but that might take a while before adding any tangible benefits are seen.
About Author / Additional Info:
Chirag Sharma is Digital Marketing Consultant in SJ Seymour group headquartered in Hong Kong. SJS Markets provides research, advisory, execution services and private Wealth Management Solutions.
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