Making Sense of the Markets

Yesterday, bund yields and Treasury yields went up, and equities went up a bit. So far, so normal. But Spanish bond yields went up; and bund yields rose considerably more than Treasury yields. Today, Spanish yields have edged up again, bund yields are up, Treasury yields are down, and equities are up a little.

Some commentators have been quick to speculate that bund yields have risen because the market thinks that Germany’s credit quality has declined. Well, that is all very nice, but the credit quality of the UK and US have declined over the past few years, and you may have noticed that their bond yields are at historic lows. Credit quality is not driving the bond yields of developed countries in the present environment, except for dodgy ones in single-currency regimes. German sovereign bonds remain at a discount to US sovereign bonds. It is possible, of course, that the situation is changing; after all, Germany is in a single-currency regime, and the market may be coming to perceive it as dodgy. But it seems rather too soon to make that particular call.

What is true is that equities and bond yields have been broadly flat for the past three days (since the Spanish bailout was announced), while German yields have risen a little. Since German bonds are as low as they are partly on account of a shortage of decent collateral, a more reasonable interpretation would seem to be that the quantity of decent collateral has increased in the past three days — i.e. that the Spanish bank bailout has been helpful. What is the new decent collateral? Presumably it is not Spanish bonds — their spreads have widened — but perhaps it is the senior paper of Spanish banks; or perhaps Spanish banks’ access to financing has improved, so their demand for high-quality collateral is less.

Is this consistent with the increase in Spanish yields? On reflection, I suppose it is. Spanish banks have been made more secure at the expense of the sovereign. If the sovereign fails, Spanish banks will go under as well; but the risk of Spain going bust is questionable, whereas the risk that the Spanish banks were in need of recapitalisation was close to 100%. Spanish banks are definitely less shaky than they were a week ago.

Still, it is strange that Spanish yields have not fallen. Some argue that the reason is that market participants are not sure whether the bailout means that Spain has lost access to market financing and will now have to have a sovereign bailout. Perhaps it will take a bond auction (and ECB purchases of Spanish bonds via the SMP in the meantime) to bring yields down. Or perhaps it will just take time. Or perhaps I am trying to read too much into three days of data in volatile market conditions.

The Fundamentals of Tsipras

Bloomberg has a piece on the leader of SYRIZA, which points out that he has long been a radical and a protester and may have no skills in negotiating with other political leaders ( The piece makes him sound like a student radical, but his actual proposals, set out in the FT today (, seem rather moderate. He laments the fact that Greece’s tax take as a percentage of GDP is 4% behind the Eurozone average (analysis by FT Alphaville suggests that the number is more like 7% and says that he wants to bring it into line using increases in direct taxation and to stabilise public expenditure at 44% of GDP. This may not be the EU’s plan, but nor is the raving of a lunatic. The more Tsipras is able to come up with reasonable proposals, the more likely the EU is to blink first, should he upset the status quo.


A Mr Yam, former head of the HKMA, has said that the HKD peg should be reviewed. Various leaders were quick to rally round to defend it. I was wary of betting on a breaking of the peg using options — one would just be wasting premium if nothing happened — but I note that HKD forwards in the 5y to 9y range are in the middle or top of the existing band and would seem to offer a low-risk trade with large upside if the peg is broken.


  • US federal budget balance continued its inward drift on a 12-month rolling basis, but partially reversed last month’s jump inwards, d.e., May.
  • Japan core machinery orders 5.7% b.e. Apr. This gave an early boost to Asian markets.
  • French CPI fell to 2% YOY d.e. May.
  • German CPI fell to 1.9% YOY a.e. May.
  • Eurozone IP -0.8% b.e. and fell, Apr. Eurozone data are so late in being released that it is hardly worth following them.
  • US retail sales -0.2% d.e. May. The first negative number since mid 2011. Core -0.4% d.e. and the worst monthly change since May 2010.

Coming Up

  • Swiss rate decision and statement
  • US CPI