Bond Traders in Europe Deal in High Expectations, and Fear

(…..) Some traders worry openly that too many of their colleagues lack skills to decipher the conflicting signals from Europe’s leaders in an industry ever more dependent on perception, political guesswork. Short-term fluctuations of bond rates, they concede, are not always an accurate reflection of value and risk. Yet traders are being taken as last word by politicians on any range of government policies, and are often misinterpreted. “We used to be able to measure everything to the nth degree,” said Tim Skeet, managing director of fixed income at the Royal Bank of Scotland. “These days, nothing is measurable. This has become less about number-crunching and more about oracle of Delphi.” Economists tend to treat bond market as a rational player imposing budget discipline on politicians. Politicians portray it having the conscience of a mob, accusing “bond vigilantes” of undermining Europe’s recovery and its cherished welfare state. The reality is more nuanced. That fear among traders and their jittery investors helps explain why rates have surged for troubled countries like Italy and Spain, and why interest rates have hovered near negative territory for more trusted German bonds: so terrified are investors that they are effectively paying Berlin for the privilege of lending it money. But in risk, there is also profit, lots of it, as well as loss. The amounts now at the command of bond market have made it vulnerable to kinds of speculation, volatility and returns more associated with stock market. As government debt across European Union has reached 88% of gross domestic product, and much higher in a number of countries, according to Eurostat, some sovereign debt funds have made investors annual returns of 9%. Of course, investors who held Greek government bonds suffered steep losses. With so much leverage at its disposal, bond market’s judgments can have power of prophecy, that is, they can be self-fulfilling, influencing events even as traders assess them from trading floor. If investors and traders judge Spanish bonds to be risky because Spain’s government may default, help make it more likely Spain will indeed default, by raising its borrowing costs. “Whatever Spanish government does, and it has done a lot, it doesn’t actually help much, because the market is pretty much convinced a full-fledged bailout is required,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London that specializes in sovereign credit risk. It has not helped, of course, for months Spanish government denied or misrepresented the depths of its banking problems. Nor that before Spain ran into trouble, holders of Greek debt had already suffered steep losses. And given Spain’s deep economic problems, some believe a bailout may be needed. If politicians expected bond market to speak with one voice, traders commonly complained, would help if politicians did. Olivier de Larouzière remembers calling a crisis meeting in the Left Bank offices of Natixis Asset Management in Paris during one watershed moment in June. That day, Mr. de Larouzière, who as head of fixed-income euro securities at Natixis manages 18 billion euros worth of debt, watched as yield on Spanish 10-year bonds climbed above 7% while Chancellor Angela Merkel of Germany and her European counterparts scrambled to persuade markets that a bailout for Spain would not be needed (…..)



Acerca de ignaciocovelo
Consultor Internacional


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