FRANKFURT (DEUTSCHE-BOERSE AG) – With the flight to safe havens, government bonds with good credit ratings are increasing. Company titles are not required. In the case of Russian papers, the fear of payment defaults is increasing.
March 4, 2022. Frankfurt (Frankfurt Stock Exchange). The war in Ukraine and fears of a nuclear crisis are once again causing investors to flee to investments they perceive as safe. During the night, Russian troops fired on Europe’s largest nuclear power plant in south-eastern Ukraine and partially set it on fire. According to Ukraine, the fire has been extinguished and no change in radiation can be measured. Stock markets fell worldwide.
Negative yields on ten-year Bunds
German government bonds also remain in demand in view of the war. The trend-setting Bund future rises to 169.76 points. The yield on ten-year Bunds fell to zero and was negative for the week. In the middle of the week, the news of a peak in inflation in the euro zone initially triggered selling.
“The war remains the focus of events on the financial markets, which is why the demand for investments that are perceived as safe, with low volumes and high volatility, remains high,” summarizes Arthur Brunner from ICF Bank. That weighs on returns.
“Sales shape retail, but nerves are not as shaky as at the beginning of the pandemic in March 2020,” explains Gregor Daniel from Walter Ludwig Wertpapierhandelsbank. At that time, most market participants would have sold unlimited in panic. In comparison, trading is currently running calmly given the circumstances.
“Investors are very unsettled, bonds are widespread and under pressure in all maturity bands, liquidity is low, there are no buyers, the secondary market is practically coming to a standstill,” reports Tim Oechsner from Steubing AG from the Frankfurt floor. “Everyone is turning their attention to Ukraine and oil prices.” However, the next steps of the central banks would also be considered: The ECB’s upcoming inflation forecasts should take into account the war in Ukraine and the new inflation rates.
Stagnation concerns: will the ECB continue its easy monetary policy despite inflation?
Although inflation is continuing to rise due to sharply rising commodity prices, which would speak for significant interest rate increases, the expectations of interest rate policy are no longer as high as they were a few weeks ago, as Brunner adds. “Market participants expect the ECB to continue its loose monetary policy despite rising inflation. As a result, the prices of bonds from the peripheral countries are rising,” says Brunner. With regard to the fluctuations in commodity prices, he adds: “It is to be feared that inflation will set in, and stagflation can no longer be ruled out.”
US economic pessimism hardly justified
Deutsche Bank predicts possible price losses for US government bonds: “The prices of US government bonds could soon come under pressure again, although they are currently in high demand among investors as a ‘safe haven’.” Because the US central bank is likely to stick to its interest rate turnaround and soon melt down its holdings of previously purchased bonds. If expiring bonds were not replaced by new ones, an important buyer in the US Treasury market would disappear. The FED has acquired a good 60 percent of the government bonds issued since the beginning of the corona pandemic with a total volume of 5.4 trillion US dollars. In addition, the currently very low inflation-adjusted yield – also “real yield” – of minus 4.2 percent on ten-year US government bonds speaks for prospectively rising yields in the USA. Real interest rates were similarly low during the oil price crises of the 1970s and 1980s.
Deutsche Bank’s conclusion: “In view of the solid growth rates to be expected in the USA, the economic pessimism priced into Treasury prices is hardly justified.”
Government papers coveted
According to Brunner, almost exclusively government bonds are in demand on the bond market. States would mainly increase existing bonds, including Germany, Spain and Great Britain. Interest rates are very low. “The increases are on schedule and are selling well,” explains the bond expert in Frankfurt.
A possible insolvency of Russia concerns holders of Russian bonds. Some of the country’s currency reserves have been frozen, and rating agencies have massively downgraded Russia’s creditworthiness. According to Brunner, Russian bonds have not been tradable in Germany since Wednesday. A war loan from Ukraine was placed on the domestic market at 11 percent interest for $273 million. “The paper cannot be bought here in this country.”
Hardly any new issues from companies
The supply of new corporate bond issues continues to decrease. Oechsner adds: “The primary market has come to a complete standstill.” There would be no buyers. “Investors are absolutely unsettled.”
Also in the secondary market: “Sales predominate”, Daniel continues to state. “As uncertainty increases, sales will decrease.” Even titles that were still considered bargains a few days ago are not being bought.
Price slump in Ekosem bond
According to Daniel, some price reactions are already signaling that market participants are no longer expecting a regular repayment: Ekosem bonds (DE000A2YNR08) (DE000A1R0RZ5) are in free fall with price slumps of 45 percent or 50 percent on a weekly basis. Daniel refers to news that the company is suspending its business forecast for 2022: There are too many imponderables for the operative business and the financing options due to the sanctions against Russia. In a letter to the employees, the board of directors pointed out the risks of devaluing the ruble and raising interest rates.
Oechsner points to settlement problems with stocks with a Russian background: “Therefore, there may be liquidity restrictions in trading and trading suspensions for these securities.”
Brunner sees isolated demand for PREOS Global Real Estate & Technology securities with a term of 2024 and a coupon of 7.5 percent (DE000A254NA6). Brunner pointed to reports that the parent company publity AG has specified its plans to take on a new major shareholder.
by: Antje Erhard
March 4, 2022, © Deutsche Börse AG
(Deutsche Börse AG is solely responsible for the content of the column. The articles are not an invitation to buy or sell securities or other assets.)