Why The "Time Is Up" For Europe's Peripheral Bond Rally

By Bloomberg macro and Market Live commentator Kristine Aquino

Time’s Up for Euro Area Periphery Bond Rally

The world-beating run for euro-area periphery bonds is coming to an end. Yields are likely to finish 2018 higher and spreads to core securities will probably widen as the conclusion of quantitative easing exposes bloated debt burdens amid slowing economic recoveries. After all, we’re talking about a group of nations that includes three (Greece, Italy and Portugal) of the five most-indebted countries in the developed world, as measured by debt-to-GDP ratios.

Portugal’s bonds had a huge rally in 2017 as the nation’s progress on managing its debt load helped it win back investment-grade status with Fitch and S&P. But investors had anticipated the upgrades long before they came about, curbing the likelihood of the bonds benefiting from any extra follow-through.

And the economic environment there and elsewhere in the region is likely to become more challenging this year. Growth for most of the periphery will either slow, or be little changed, in the next two years, according to analyst estimates compiled by Bloomberg.

In 2018, Italy’s real (inflation-adjusted) GDP is forecast to fall 0.2 percentage points, while a 0.6 percentage- point decline is seen for Portugal and Spain.

Greece is the exception, with real GDP expected to rise 0.9 percentage points, though that follows consecutive declines in six of the past eight years.

Those economic fundamentals are likely to become a larger influence on investor appetite for the debt as the end of the ECB’s bond-buying program looms. Given that’s likely to lift yields on benchmark German debt, it’s likely to raise rates for periphery nations too.

And since QE arguably benefited periphery debt the most, the end of central-bank debt purchases also risks dimming periphery bonds’ appeal on a spread basis. Italy and Spain are also particularly vulnerable to idiosyncratic political risks in the medium term.

The aftermath of December’s Catalan election, where separatists garnered a majority, may provoke another flare-up for Spanish bonds. While the 10-year yield spread over Germany has receded from levels seen in October, when the region’s latest secessionist push came to a head, it’s yet to return to last year’s tightest levels.

Over in Italy, the peak of political risk will come later in 1Q, around the time of the March 4 election. The euroskeptic Five Star Movement leads in the polls and a protracted campaign may boost its prominence.

Together, there are considerable challenges for euro- area periphery bonds in 2018. With two-year yields negative in all those countries apart from Greece, the bar is too high for them to repeat their outperformance since the end of the region’s sovereign debt crisis.



Haus-Targaryen Four Star Mon, 01/08/2018 - 07:11 Permalink

Or they could revert to their old currencies and have a massive default wiping out their debt. 


But that would be bad for the banks, finance industry and the "European dream" so Greece will keep exporting their educated working class; importing millions of Africans and muzzies; and selling their daughters into prostitution, but hey -- they're part of the eu  #worthit 

In reply to by Four Star

To Hell In A H… Justin Case Mon, 01/08/2018 - 08:09 Permalink

A banking friend I know said Greece was being "Africa'ed"  it was a new and interesting choice of word, but absolutely. He said IMF/World Bank restructural adjustment programs and austerity is by design, from the very outset, designed to fail. They leave the country barely treading water, with a pulse, but not yet dead and leave it rolling over for as long as it can be sustained.

What upsets me is that I was riling in 2009, that Greece was being raped and gutted from the inside out. The Troika forced Greece to sell her deepwater ports, Helena Telecoms, her transport infrastructure and a few other goodies and some of my ideologically strung up brothers were laughing at Greeks demise.

The plebs just don't get it. Whether it's Greece, or Libya, or Syria, or Iraq, or Ukraine, or Iran, or Venezuela, or Poland/Czech Republic/Hungary et al being forced to take in refugees, or Sudan, or Chad, or the D.R.Congo, all of these countries to name a few face the same rapacious financial enemy. 

Watch this.. https://www.youtube.com/watch?v=CrwzxkQKMzE   from 3.04 sums up the world we live in, the divisions, how it is done and their means of achieving it.

In reply to by Justin Case

OverTheHedge NidStyles Mon, 01/08/2018 - 07:31 Permalink

They are not actually allowed to fix their countries. Greece especially no longer has any independence, and is run from Frankfurt by the Troika. Bless you for thinking that the EU allows for independence, freedom, the right to do business as they see fit etc, so on and so forth. Everything is exactly the way the people in charge want it to be - it must be, as they tell us this is the case often enough.

Or what Justin said - more effectively than I did.

In reply to by NidStyles

OverTheHedge new game Mon, 01/08/2018 - 07:52 Permalink

Strangely, I don't think Greek debt qualifies. In other words, all other countries in the EuroZone get a subsidy, guaranteed buyer of last resort and manipulated low interest rates, but Greece, the only country that actually needs all that, doesn't qualify. (It would seem that Greece, Ireland and Portugal don't qualify, because their bonds are not available on the secondary OMT, but this might be out of date)

In reply to by new game

OverTheHedge new game Mon, 01/08/2018 - 08:17 Permalink

Most of the debt has been transferred to the Central bank, so I suppose that it is a moot point - when the time comes to roll over the debt, Greece can only default if the central bank allows it to default, on the central bank's debt. Clear? Only in the land of the Belgian Waffle. We need Ghordius to explain how it all works, and how Greece will be much the better for all this debt.

In reply to by new game

WallHoo OverTheHedge Mon, 01/08/2018 - 09:25 Permalink

You are correct.Greece is the only country that doesnt quallify for QE and its the only one that badly need its.A lot of "reforms" took place but with little meaning(actual production).


I study monetary poilcy and everything that goes with it.I know many thinks about how an economy runs,but to this day i havent figured out why is Greece out of any debt (meaningfull)programs from the ECB...Greece is the only country in the EU that has managed to get its house in order with consecutive budget surpluses,if the ecb wanted greek bonds could go to negative overnight just like any other country in the euorozne but that just doesnt happen...


Sometimes i go out of the economic field and i suspect that the less a country agrees with them(whoever they are...) the worst they treat her...Greece is a very traditional country,it can hold a lot of pressure...Is it,the long history,the powerfull church,the large army(where every citizen serves),the hightly homogenous population,clasical public education,ancient traditional values...You name it.

In reply to by OverTheHedge

Jo A-S NidStyles Mon, 01/08/2018 - 09:21 Permalink

The lack of will by politicians, that is.  French/German banks leant to Greece back before 2008, as though giving drugs to a junkie.  Most of the so-called EU bailouts have, actually, gone back to those banks.  Of the remainder, Greece has had to buy military equipment from Germany...... 


As to its current tax income, apparently it DOES cover all day-to-day outgoings - but does not, and can NEVER , cover interest debt.  That's why Greece is shafted.


As to debt, if UK off-balance sheet debts were included (eg state pension/most public sector pensions/PFI payments) then the UK would be worse off than Greece.

In reply to by NidStyles

To Hell In A H… Mon, 01/08/2018 - 06:17 Permalink

Papandreou. That family sold Greece down the river on more than one occasion. As for the role of Goldman Sachs cooking the books? Need I say any more? Crypto is the future and must be state-run, not by the money changers.

BritBob Mon, 01/08/2018 - 07:00 Permalink

Need to ditch the Euro and set their own financial agenda.  Brexit - Grexit whatever's necessary. 

The Crazy EU- Gibraltar

MEPs and legal experts have claimed the veto over the territory’s future after Brexit would give Spain special status among EU nation, when they should be on an equal level.

The EU’s Brexit negotiating guidelines stated that the Brexit deal will not apply to Gibraltar without an “agreement between the kingdom of Spain and the UK”.

Experts have told the Telegraph that the veto could be illegal under EU law.

Spain's Gibraltar claim has NO legitimacy and YES would be illegal.

They've effectively signed the territory away 3x times!

Gibraltar – Spanish Myths and Agreements (single page):


InnVestuhrr Mon, 01/08/2018 - 07:50 Permalink

The troika program was a great success because the EU banks, especially German & French, were bailed out of their bad Greek loans/bonds.

The programs were ALWAYS about saving the banks.

zer0 Mon, 01/08/2018 - 08:15 Permalink

Not too worry, these countries just need to liquidate whatever hard assets their country still might possess, though Greece have already dipped into that pot significantly. The troika's plan is going just great. Greece and Ireland are prime examples of how the European central bank operates.

small axe Mon, 01/08/2018 - 08:35 Permalink

the central bankers' neatest trick is how they have convinced the average citizen that their policies benefit, not enslave, populations. The politicians and media who perpetuate this lie have as much to answer for as the banker thieves themselves. 

Paul Morphy Mon, 01/08/2018 - 10:36 Permalink

European Central Bank QE programmes have lowered yields on bonds issued by peripheral countries by 50-150 basis points


The European Central Bank’s massive stimulus scheme has lowered 10-year government bond yields in the euro zone by between 50-150 basis points, with the largest impact seen in Ireland and Portugal, ratings agency Moody’s said in a report on Thursday.

“The impact of ECB purchases on government bonds yields for euro area peripheral countries has been around 50 basis points greater, on average, than for core countries,” Colin Ellis, a Moody’s managing director and co-author of the report said in a release.

By the end of this year, total purchases under the ECB’s various asset purchase programmes will approach 2.3 trillion euros ($2.71 trillion), around a fifth of euro area nominal GDP, Moody’s said.