Eurozone puzzles from Karl Smith

by on November 29, 2011 at 10:33 am in Economics | Permalink

Some odd key facts though:

  • German Bunds trade below the deposit facility rate at the ECB and well below the Overnight Rate. I tell my students that this can’t happen. But, it is happening.
  • Auctions for Sovereign debt are not only over-subscribed but more over-subscribed as the yields rise. Implying that the appetite for debt increases as the yield does. This makes sense if you are planning to Repo the bond. What doesn’t make sense is why this doesn’t drive down the actual yield
  • Generally speaking there is enormous divergence in at the short end of Sovereign Debt curve and its not clear what theory of the world supports this.

p.s. None of these are good news!  Here is further comment, very useful.

1 123 November 29, 2011 at 12:50 pm

“German Bunds trade below the deposit facility rate at the ECB and well below the Overnight Rate. I tell my students that this can’t happen. But, it is happening.”

Non-banks cannot access the deposit facility at the ECB directly. Intermediation via commercial banks is too risky. This explains the anomaly.

2 NAME REDACTED November 29, 2011 at 4:38 pm

+1

3 Phelps November 30, 2011 at 11:18 am

If confidence in the banks is so low that investors won’t even use them as a pass-through, how far can be we from a flat-out bank run?

4 Firat Uenlue November 29, 2011 at 12:54 pm

Not the only puzzle in the bond markets. How can people say that inflation-expectations are factored into prices when UK bonds yield close to a historical low, when inflation is at more than 4%? Arguing the UK is safer than Germany because of the marginally lower yield on its obligations it absolute non-sense. It is mainly due to QE by the BoE and the prices of UK bonds do not reflect market fundamentals.
In what universe’s economics faculty can somebody claim yields on UK bonds reflect fundamentals (especially after today’s disaster, 100bn+ and counting) and the low yield they pay is a sign of them being ‘safe’?

5 NAME REDACTED November 29, 2011 at 4:40 pm

Whoever says that inflation expectations play into bond prices is kidding themselves.
Its only true when
1) you have other long term, inflation resistant assets
AND
2) the fake nominal appreciation in those assets won’t be taxed away
AND
3) the central banks are not manipulating bond prices

6 JSK November 30, 2011 at 2:23 am

Inflation-indexed bonds?

7 joshua November 29, 2011 at 1:18 pm

Animal spirits!

8 Yancey Ward November 29, 2011 at 1:39 pm

They should be predictable. Just kidding.

9 joshua November 29, 2011 at 1:21 pm

By the way, does anyone know if there’s a website with a good schedule/calendar of upcoming euro bond auctions? I only knew about Belgium and Italy this week from various news articles but I hear there’s a lot more coming up and I’d like to know when to grab the popcorn…

10 dearieme November 29, 2011 at 1:32 pm

Look, macroeconomics is rubbish, that’s all.

11 Silas Barta November 29, 2011 at 2:59 pm

Wait, this Karl Smith guy has students? Even when he claims that interest rates in a government’s fiat currency must always be below long-term growth?

He’s part of the problem.

12 Bryan Willman November 29, 2011 at 3:45 pm

A few days ago there was much news about a German bond issuance “failing” – or at least not being fully subscribed.

Today there is news that Bunds are literally worth more than the Euros they are denominated in.

How can these both be true?

13 NAME REDACTED November 29, 2011 at 4:41 pm

The ECB buying Bunds with Euros.

14 NAME REDACTED November 29, 2011 at 4:44 pm

“What doesn’t make sense is why this doesn’t drive down the actual yield”

Because the central banks set the yields by releasing currency.

15 flashman November 29, 2011 at 5:30 pm

Look at them pat themselves on the back after approving to give more IMF bailout money to Greece.

16 prior_approval November 29, 2011 at 11:26 pm

Countdown to eurogeddon at 8 days – euro essentially unchanged against the dollar – http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html

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