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2 sats \ 7 replies \ @TomK 2 Oct 2023 \ on: Please add a sub called "macro" or "economics" or similar meta
This would be great. Good idea. Like now would be the moment to write about the ECB buying german bunds like crazy to defend yields in the commiezone but is sacrifycing the ''commie'' (or euro) to hold the system together.
the ECB [is] buying german bunds like crazy to defend yields
link?
[the ECB] is sacrifycing the ''commie'' (or euro) to hold the system together
link?
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Please watch yield spreads, yields of us and german gov bonds. Than you put the move of the us/ eur besides. Than You analyse their holdings on their balance sheets and You see what's happening.
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Please watch yield spreads, yields of us and german gov bonds
The 10 year US bond pays a rate of 4.67%
The 10 year DE bond pays a rate of 2.91%
I have heard about an arbitrage play that I think involves shorting currency whose country pays a low interest rate on their bonds and longing currency whose country pays a high interest rate -- or maybe I got that backwards. Is that part of why you're drawing attention to this? If so I don't know how or why it works and I'd appreciate some insight.
Than you put the move of the us/ eur besides
The movement of the USD has risen dramatically since July, it has surged by almost 7%
Than You analyse their holdings on their balance sheets
I'd like more clarification on this part. What am I looking for? Here is the US treasury's balance sheet: https://www.fiscal.treasury.gov/reports-statements/financial-report/balance-sheets.html
It is massive and there are so many things to look at and I don't know what I'm looking for. The german treasury's balance sheet would would probably be even harder to look at because it will probably be in german.
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To try and intuit how bond arbitrage might work I am throwing out strings to see if they connect to anything I'm more familiar with. One possible point of connection is this: in order to arbitrage bonds, you'd have to buy and sell them, and "buying and selling bonds" is also what countries do during "quantitative easing" and "quantitative tightening." Quantitative easing involves buying bonds, which lowers their interest rate, and it weakens a currency. Quantitative tightning involves selling bonds, which raises their interest rate, and strengthens a currency.
If my intuition is right, then you could engage in bond speculation by (1) buying a country's bonds and (2) simultaneously shorting its currency. But that seems like a strange course of action to me because if you buy a country's bonds you expect to get some money back from that country later, and if you think its currency will fall in value, why would you want to receive money from it later? It won't be worth as much as it is now. So I think some part of my intuition is wrong.
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Come on, You are a pro! You get the stuff better than I! What You're aiming at is something like the famous Yen carry trade. Take up credit denominated in a weak currency to invest it in an appreciating currency and harvest the yield or dividend. Later you pay back the loan with the appreciated currency. But what's going on in the Eurozone is sth. different imo. The ECB needs to hold the euro stable as of rising energy inflation. Gov debt is rising fast therefore it needs to hold the bond yields down by bying this stuff. But You can't do both simultaneously meanwhile the elefant in the room (Fed) is pushing up yields like crazy and is attracting Your capital what pushes yields even higher and weakens the euro...
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ok cool this makes more sense to me
Take up credit denominated in a weak currency
So rather than "buy" a country's bonds you want to "sell" them.
Buying a bond isn't "taking up credit" -- it's giving it out. It's giving the country a loan. You want to take out a loan -- you want that country to give you money that you have to pay back later, once it's depreciated. If, instead of "buying" a bond from that country you sell a bond, you get some of their money right away (just like what happens in a loan), but it's not money you have to pay back later, so that's even better. Sell the bond, take the proceeds, and buy a stronger currency with it.
But this part still confuses me: doesn't the act of selling a bond increase interest rates on that country's bonds and therefore strengthen the currency that you want to fall?
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Yes, the ECB needs to compensate for the ongoing bond-selling by bying them up and so stabilizing the yields. But that way they are doing it with new created euro that weakens more and pushes up inflation
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