Yesterday we asked: Why has the latest round of successful bond auctions gone better than previous ones, even when everyone knows they were ECB-manufactured victories?
BTIG’s Mike O’Rourke provides a clue, which kind of boils down to: European solidarity is happening.
We suspect the German Chancellor’s new attitude is related to the fact that the EU issued its first European Financial Stability Mechanism (EFSM) 5 year €5 Billion Euro AAA bond for the Irish bailout last week. The EFSM is expected to raise a total of €17.6 Billion through bond offerings this year. The program’s cousin, the European Financial Stability Facility (EFSF), is expected to raise €16.5 Billion through bond offerings this year, with its first offering later this month.
The simple fact is that now these nations, which are already linked by currency, are becoming further linked by these debt offerings backed by the EU. Sure, these amounts are small and well short of the Eurobond offering floated last month, but it is a step closer and has placed all of the political leaders on the same team. As such, German bonds weakened modestly as the bonds of the problem children rallied modestly today. Chancellor Merkel will want to make sure each of these issues is received with strong demand, hence the cheerleading.
One of the benefits of the newfound solidarity is that it boosts confidence. The bonds provide the opportunity to get a higher yield than German or French government bond yields, but are still backed nearly 50% by Germany and France. The bonds become a venue through which other nations can provide support, but without taking the risk on a specific troubled sovereign.
This is one of the reasons China and Japan are now expressing support for the EU and the Euro on a daily basis. China ($2.8 Trillion) and Japan ($1 Trillion) account forover 40% of the $9 Trillion in global currency reserves. Today, PBOC Deputy Governor Yi Gang expressed support for the Euro and Europe.
Dow Jones ran the headline “China Central Bank: China seeks to stabilise the Euro… .” Because of China’s quasi-peg to the Dollar, China never seeks to support the Dollar. Every time it weakens, their exports become more attractive. In a world that is worried about global devaluations, both export heavy nations, China and Japan, would like to see the Euro stabilise. Both nations have the reserves and it is in their interest to support the Euro – these bonds provide them an avenue to do so.