The US cash Treasuries market may be closed today( although with futures trading sharply lower, the implications for the 10Y were clear: 4% is next)…
… but Europe did not have that luxury and starting early this morning, it was non stop selling across German bunds after Bloomberg reported that Chancellor Olaf Scholz “will reverse a steadfast German position and support joint issuance of European Union debt to cushion the blow of the energy crisis as long as the freshly raised money is disbursed to struggling member states as loans, not grants.”
Scholz signaled openness to use common borrowing on the sidelines of an EU summit in Prague last week, according to people familiar with the chancellor’s stance. The change in position follows criticism from other leaders that Germany’s EUR200 billion ($194 billion) national aid plan could trigger economic imbalances in the bloc.
As Bloomberg adds, the issuance of joint debt would represent a dramatic about-face for the German government, which, along with other countries including the Netherlands, has pushed back against such measures (although it did reverse after the covid crash). But calls to action have been increasing, reflecting concerns about the massive spending that will be needed for the EU to get through a winter without Russian gas and to transition to alternative energy supplies.
In immediate response, however, German bonds tumbled (yields spiked)…
… while Italian bonds – which would immediately benefit from such mutualization – outperformed, with the nation’s 10-year yield premium over Germany — a closely-watched gauge of risk in the region — falling 12 basis points to below 2.4 percentage points.
The report, clearly a trial balloon for what Germany may or may not do next, gave Germany enough info to see how the market would react to such debt mutualization, and just two and a half hours later we got a denial of the original Bloomberg report, this time from Reuters, according to which the German government rejected the Bloomberg report, saying “such plans are not known in the government.”
Hearing about the rejection, the bond market did a sharp U-turn, with German Dec’22 Bund futures rallying from 135.95 to 136.50m while Treasury futs also jumped from 110-24 to 110-30. The reversal also helped boost stocks which tracked the reversal in yields and spiked sharply higher.
