Week in FX Europe – Summer Doldrums Increase German Finance Costs

Do not rule out Germany paying its highest 10-year funding costs in a year and a half next week. They will be the only Euro country coming to the bond market with an issue slap bang in the middle of the Euro-annual summer holidays.

Credit rating agency Fitch reaffirmed Germany’s triple-A credit status earlier this week, citing some “overachievements” by Merkel’s right-wing coalition government on the fiscal front. They also happened to mention that various risks related to the Euro-zone crises directly had actually eased.

Improving Euro data has allowed their own bond yields to back up; it’s now becoming more of a global phenomena. Even the Fed’s plan to potentially reduce the size of its bond buying requirements (tapering) is also putting upward pressure on global bond yields. However, at the short end of most Central Banks yield curve, yields remain relatively low, supported by accommodating monetary policies being offered by most major central banks. The ECB’s ‘forward guidance’ stance will continue to anchor short-term yields.

Germany will offer €4b of the current benchmark 10-year, +1.5% May 2023 Bund. This will be the last time that they will tap this particular issue. The new 10-year Bund will be introduced next month. At today’s current levels the German government will be paying up – the secondary market is trading at +1.69%. Because of the holiday season that’s in it, both dealers and investors will be expecting some give and slippage due to the potential lack of interest – besides dealers like the issuer to pay up!

• UK Trade Deficit Narrows Due to Rising Exports
• German Economy Ministry Confident on 2nd Quarter Growth
• Germany Economic Data Points to a Healthier European Engine
• Greek Unemployment Hits New Record at 27.6 Percent
• Swiss Inflation Unchanged in July
• Swiss Unemployment Rate Unchanged at 3.2 Percent in July
• BoE Mark Carney Confident Forward Guidance Should Boost UK Economy
• OECD Says UK Growth to Strengthen in 2013
• BOE’s Carney Keeps Stimulus Options Open
• Italy’s GDP May Signal End of EZ Recession
• Swiss Franc Looking Precarious on Euro-Zone Risk
• Bank of England to Unveil New Rate Setting Guidance on Wednesday
• IMF Warns France’s Public Spending and Rigid Labor Market Drag Recovery
• UK Manufacturing Rises in June
• Europe’s Economy is Slowly Stabilizing

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