If you’re waiting for the pendulum of sovereign default and currency concerns to swing away from Europe and towards the U.S., keep waiting.
German government bonds are taking it on the chin as it becomes increasingly clear the country will indeed be forced to bailout Europe’s under-performing nations.
Yields on 10-year bunds rose as much as 0.24 percentage point relative to similar-maturity Treasuries since April 5 and BlackRock Inc., the world’s largest money manager, said it no longer pays to own the debt amid Europe’s fiscal crisis. Ignis Asset Management added to a bet that bunds would lag behind U.S. debt after the $61 billion rescue was announced April 11.
The cost of five-year swaps on Greek debt was 455.4 basis points as of 9:05 a.m. in London today, according to CMA DataVision prices, compared with a record intraday high of 470 on April 8, and up from 438.2 on April 16. German swaps were at 35.8 basis points, the highest level since March 1.
Germany’s relative credit risk is expected to decline against the U.S going forward:
Bund yields may keep increasing relative to U.S. debt, narrowing the difference to 45 basis points by the end of June and marking the worst performance by Germany’s debt since the fourth quarter of 2008, according to the median estimates compiled by Bloomberg. All 18 strategists surveyed predict bund yields will rise, reaching 3.65 per cent in the fourth quarter, from 3.08 per cent today. Two-year yields will increase to 1.96 per cent from 0.88 per cent.
Thus, if this forecast of relative perceived credit risk turns out to be true, expect the euro to remain under pressure against the dollar.
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