Today, the editorial staff of ProiezionidiBorsa answers those who ask: what if the real financial bubble was in BTPs and government bonds that pay zero?
Starting from the recent Covid 19 pandemic, the Central banks from every continent pumped liquidity galore into their respective economies. Almost always, they have done so by buying on the secondary market i public debt securities of the respective Governments of reference.
Moreover, this expansive policy is by no means expired in close proximity. That is, these monetary institutions will still continue to buy sovereign bonds in the months to come, in order to support the struggling economy.
But now the question arises: what if the real financial bubble was in BTPs and government bonds that pay zero? The question is neither rhetorical nor trivial. The effect, in the long run, of this massive sovereign bond purchase, today can be measured at least under a double dimension. Let’s see which ones.
The universe of government bonds
The world of sovereign bonds today presents at least two anomalies.
On the primary market, yields turn out to be increasingly declining, ranging from negative to vaguely positive. Italian government bonds, up to five-year maturities, in fact have negative yields. It is the buyer who pays the issuing Treasury to have its securities in the portfolio.
A classic example of the world upside down. Then on maturities over five years the yields turn positive and go to “rise”. We quoted because, according to the theory, at least something would not add up.
Italy is, in fact, a country with a high debt, a plummeting GDP, a creaky rating. In addition, there are not many hopes of a return in the short term of the various parameters such as debt / GDP, deficit, etc. Basically, at least according to what theoretical principles suggest, bonds with similar characteristics could not pay such (low) rates.
The situation is not better on the secondary market either. In fact, when yields go down, prices are known to go up. This law applies to all bonds, especially long-term bonds issued in previous years, when coupons were richer. So today buying bonds on the secondary is often equivalent to paying them above 100.
The progressive and subsequent lack of attractive returns on the market has led, over time, to an increase in their demand. The prices of which are now skyrocketing.
Spread and ECB
Now, behind all this there is by no means the recovery of our country’s climate of confidence in international markets. More simply, however, the reason for the anomaly is due to the ECB’s policy of supporting the economy. Eurotower even increased its monthly purchases of securities through the PEPP last week, from € 14 billion to € 20 billion.
All this has also contributed to deflate the spread, after the flare-ups of spring. Currently, the differential with the German Bund at ten years is sailing calmly below 120 points.
This trend, according to various financial experts, is also downward over the next year. Someone said that in 2021 it could reach 90.
What if today the real financial bubble were in the BTPs and government bonds that pay zero interest?
In essence, the huge liquidity available on the markets leads investors to buy everything, including bonds. Think of all those institutional investors who, by statute or mandate, must invest in risk-free assets.
In a nutshell, investing in a bond today means knowing in principle that you have gains between negative, zero and almost nothing. Current 10-year government bond yields are very little compared to their time duration. However, this is not without its unknowns: inflation, market turbulence, variables exogenous or endogenous to the economic system, etc.
A fairly general situation in Europe
The situation is quite general in Europe. For example, this week, the Portuguese 10th anniversary, for the first time in its history, has even reached zero.
Always remaining on the same deadline and always taking as reference the “peripherals” (those who once were the PIGS), the situation is not very dissimilar. In Italy, the ten-year BTP offered 0.56%; in Greece 0.68% and in Spain around 0.07%.
One would scream with joy in the face of similar metamorphosis of the ex-PIGS. But we know that this cancellation of returns is not the expression of as many economies that are back on track. Therefore, the financial bubble, paradoxically, could be precisely on sovereign bonds that pay zero interest on medium-long maturities (on the secondary). Below, in fact, those interests even have a minus sign.
We have now entered the era of negative rates, an era that has eliminated the time factor. Obviously only the passage of time, and the markets themselves, will tell us in the future if the current is, or not, a possible bubble on sovereign bonds. For now, let’s look at the data and follow its dynamics closely.
Here, then, why there are many questions: what if today the real financial bubble were in the BTPs and government bonds that pay zero interest?
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