Greece, schmeece — The Euro is all about yield

March 31, 2015 9:42 AM (UTC+8)

 

As Buzz Lightyear would say: “To parity, and beyond!”

News headlines attribute the Euro’s fall today to the ongoing Hellenic soap opera. Nobody cares about Greece. Grexit or no Grexit, Greece is irrelevant, except to a few distressed debt traders. What matters is the European periphery where the bulk of Euro-denominated sovereign debt is issued, namely Italy and Spain, and their debt continues to rally. As the ECB continues its bond-buying binge with a disproportionate emphasis on Italian debt, more and more Euro debt cross the line into negative yield territory, forcing investors out of the Euro entirely.

We update our favorite chart — the price of Italy’s 10-year bond vs. EUR/USD, at 15-minute intervals. The Europ’s last plunge back to the 1.07 level was led by a surge in Italian debt prices.

eur3-31

 

This isn’t too hard to understand: a lot of investors, including insurers and pension funds, can’t live with negative yields. If your insurance company had a portfolio with negative yields, it would have to charge you MORE in premiums than you would receive in benefits. So the ECB’s $60 billion a month in “quantitative easing” really is a way to push down the Euro, increase prices (through higher import costs) and boost exports.

Euro is headed to parity with the dollar

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