In 2016, non-euro investors dumped euro-denominated bonds for the first time in history.
Moreover, euro-area investors barely made purchases according to the ECB’s analysis of euro area net portfolio investment outflows.
Annual net purchases of non-euro area debt securities by euro area investors totaled €364 billion in 2016, only slightly below the all-time high of €382 billion that was recorded in 2015. However, this masks the fact that the fourth quarter of 2016 saw euro area investors become net sellers of non-euro area debt securities, the first time this had happened since the second quarter of 2012.
Net sales of non-euro area debt securities totaled €26 billion in that quarter. Euro area residents’ net investment in non-euro area equities remained subdued in 2016, totaling €12 billion.
Non-euro area investors were net sellers of euro area debt securities in 2016 – the first time that had happened since the introduction of the euro. Their net sales of euro area debt securities totaled €192 billion in 2016, compared with net purchases of €30 billion in 2015.
Euro-Area Investors Shift Towards US
The non-euro area investment community dumped euro-denominated bonds but euro-area investors did not pick up the slack.
Euro area investors also become net sellers of non-euro area debt securities in the fourth quarter.
Instead, euro-area investors shifted to the US.
According to data available for the first three quarters of 2016, euro area residents’ net purchases of non-euro area debt securities in that period consisted almost exclusively of long-term debt instruments and largely reflected transactions by “other financial corporations”. This group of corporations – which includes investment and pension funds, as well as insurance companies – accounted for around 74% of the euro area’s net purchases of non-euro area debt instruments in that period, with “other private entities”2 and MFIs excluding the Eurosystem accounting for 14% and 7% respectively. Around 40% of the non-euro area debt securities that were purchased by euro area residents were issued by non-euro area governments, with securities issued by non-euro area MFIs, other financial corporations and other private entities accounting for the remainder (around 20% each).
Investors Dump Italian, German Bonds
Country-level data show net portfolio investment outflows for the largest euro area countries, driven by foreign investors’ net sales of domestic debt securities and domestic investors’ net purchases of foreign assets.
The largest net sales of debt securities by non-domestic investors were recorded in Italy (4.1% of GDP), followed by Germany (3.1% of GDP) and Spain (1.8% of GDP), while non-domestic investors were net purchasers of French debt securities (with net purchases totaling 1.2% of GDP).
What’s Going On?
It’s mathematically impossible for everyone to dump bonds because for every seller there is a buyer. Yet, both foreign and domestic investors did dump euro-denominated bonds. To whom?
The buyer of last resort of course: The ECB. The ECB’s scheduled purchase of euro-denominated bonds was €80 billion a month in 2016, providing ample opportunity for those wanting to unload those bonds to do so.
Mike “Mish” Shedlock
Those who panic first – panic best.
Seriously, EU debt should be paying around 20% interest to compensate buyers for the risk they are taking.
Anything that has risk equivalent of 20% is probably not a good bet. Picking up nickles in front of a steam roller….or a runaway train?
High interest rate instruments are high risk bets and high risk bets are not good bets for those who can’t afford to lose….unless they are already toast and it represents a “hail Mary” toss. I think the whole world is in that meme right now. Throw caution to the wind because inevitably it is all coming down regardless. The only thing that saves us is the pitifully poor math skills our schools provide their students.
So many addicts die of overdose, but usually after only years of addiction. Do we think they just screwed up, or did they realize the futility of it and how inescapable it was and that the only thing to do was ultimately upping the dose (or bet), seeing it as providing the only two best outcomes…an even higher high…or the end.
There is NOTHING in the middle for these folks. No contentment, no lasting satisfaction, no “high” that can’t be exceeded.
It is these addicts who run our world. They set the terms for everything we do. When they fail, we all fail.
Car sales plummet taking out industries with millions of jobs while those who drove cars long paid for suffer. Home mortgages collapse any your home of twenty five years becomes unsaleable and the equity you thought you had accumulated to lever against for your child’s education…is gone. Gamblers buying oil futures drive the cost of our fuels, NOT our demand, NOT even oil production….but the gamblers….betting OUR future.
Europe has nothing else left but their gamblers ponzi, playing every hand as if it were their last. Pleading, begging and manipulating people through fear to back their play yet again. Europeans are finally catching on, but they foolishly are betting that somehow America is a safe haven when in reality it is the ultimate trap. Everyone is being herded into these choices, like all those that preceded them.
Jon Sellers said:
When the ECB is a guaranteed buyer, there is no risk.
That has a little too much transparency to be effective for long. Confidence models require PUBLIC participation or they are seen as a sham.
Old Guy said:
Jon normally I would agree with you. To me it is simple why invest in negative bonds when other countries including the USA are still positive. Sure they do not cover inflation but at least your not paying he ECB to keep your money.
This does not surprise me and it will continue as long as most countries try to have negative yields.
Q: what about China? Years ago, I had an account and HSBC offered >5% on some simple savings account 😮
In Japan, the BoJ has become the #1 shareholder in uncomfortably many companies. The fairy tale of Baron Münchhausen comes to mind, where he pulls himself up in a swamp by grabbing his own hair.
The recent outlandish verbal exchanges with Turkey are like a DISTRACTION from other things. A perceived outside threat rallies the masses. It has worked for the Dutch elections as well as during the Falkland war, when Mrs. Thatcher’s popularity had plummeted, only to rise.
in Germany, the country has lost all hope:
1. Merkel’s coups are costing > 500 bn €. No parliamentary participation or some vote. Even the Nazis had an “Ermächtigungsgesetz”, some new law giving them all the power. Merkel did it all single-handedly:
a) banning nuclear power (the German constitution guarantees foreign investment by VATTENFALL etc. in nuclear power stations and there is the rule of law, contracts etc.)
b) declaring the end of Dublin I, II and III without consultations
c) opening the borders to anyone and everyone, letting people in without documents or even basic processing like fingerprinting, Iris scans, photographs and other data like age, height & weight.
Predictably, those who threw their papers away enjoy the state’s struggle to confirm their identity and to deport them when they lie about their ID. (All these murderers, alsways being “17”…)
The highest court refused to accept lawsuits regarding Merkel’s latest coup.
And when there was a parliamentary investigation into the energy coup (which has cost > 100 bn with Germans paying the highest prices in the world, AFAIK) Merkel d e n i e d all responsibility and has been left alone.
In 2016, when there was a big CDU meeting, she managed to exclude the immigration for the world from the agenda. (Like at a children’s birthday party). The politicians gave themselves standing ovations – while the taxpayers will have to pay 500 bn € over that year’s “policies” according to a professor named Sinn.
When a CEO misinvests billions, he might get charged. Merkel’S billions for Erdogan? Millions of € per returned refugee? With no money back clause? Mmm.
TBH, Eastern Europe has had it. And the day will come that “Gollum”, the finance minister cannot pull another fast one regarding “tax surplusses”. The unfunded pension scheme & all these 5.25 million civil servants and retirees who have NOT paid pension contributions. and the system b a n n i n g reserves (=> there is not even a few months’ cushion and fewer payers must carry ever more receivers)…
Add the target 2 imbalances and you will regard Germany as anything but a safe heaven for either bonds or stocks.
lovely cars, but then, this crazed country’s upper house voted to BAN all fossil burning vehicles by 2030.
Yeah, let’s abolish millions and jobs and take on the burden of other EU states’ debt and bad banks. All without a popular cote on any issues, while the Swiss have dozens votes.
Good night, Europe.
The ECB has shafted the Irish before – aiding and abetting the banks. The same happened to 200 bn of the 240 bn spent “to rescue Greece”. Who got rescued? Banks, creditors!!! And the Greek taxpayers were burdened. These games will blow up one day and come to an end. As the eCB has very little core capital.
When the ECB is a guaranteed buyer, there is no risk.
There certainly is risk.
1) How long will that guarantee last?
2) Isn’t this just shifting the risk to another sector?
The other problem is the ECB is buying 80 billion a month. This causes other parties to try to sell 100 billion a month – in other words the other parties try to increase their risk precisely because they expect a bailout.
In the extreme short term the risk is miniscule, but to say there is no risk is naiive.
“It’s mathematically impossible for everyone to dump bonds because for every seller there is a buyer.”
I think this misses the point. It is when there ARE no buyers that their price or value approaches ZERO.
ZERO is the end I think, end of the game, game OVER.
The ECB is buyer of last resort now. Hypothetically all Eurozone sovereign debt may end up being owned by the ECB and national portfolios. From that position the debt can be rolled continuously as there will always be banks willing to arbitrate between issuance and ECB secondary market purchase rules . The trouble they have is getting governments to tailor their spending to EU demands and deficit accords, to limit their borrowing and cede national assets to meet payments once they are cornered.
Nice way (not) to centrally run a mess of countries.
You are right though, once debt value is not market based, but a clear product of banking manipulation, its meaning is detached from economic reality and becomes a political measure. As most people do not earn their living from politicians and bureaucracies, in fact often resent their greed and incompetence, you could say the value is indeed zero, if not actually negative – they awarded themselves a share of the wealth of working people, displacing them in the process, and legislating over them into the bargain.
Same question, what end game?
Is it purely down to negative rates? Where is this heading?
I’m wondering if there is a chance GBP could become a safe asset even allowing for Brexit.
If USD continues ascent, Emerging get hit, cause is Euro.
Will anyone point a finger at the ECB and the Frankenstein Euro?
This is how it seems to me :
Pound is safe haven ( not speculatively for profits) as British ties outside of EU are resilient and long established hence stable in comparison, and with clear political definitions. Likely to be a rough patch as the country shakes off unwanted baggage.
I’m not an investor fish, though obviously I am subject to what goes on, likely to a greater degree than money alone, so just take this as a wider intuition. When there are problems people turn to where there is the discipline, transparency, activity , connection and communication, organization, trust. UK fits that better than most.
Well you know the endgame is mutual issuance and centralized EU governance of budgetary affairs, single border, combined military, and so on. Between here and there sure there are a range of plans for different scenarios unfolding.
Medex Man said:
@Fish — you are assuming that the EU and ECB have an end game… they don’t.
They have a plan of what they wanted to do to Europe, but they did not and still don’t have Europe’s consent or support. And as countries vote the EU down (as they just did in Netherlands, media spin not withstanding) it becomes obvious the euro-crats fantasy is going to come crashing down.
Who wants to be holding bonds when German voters will not (and probably can’t) back them up? Only fools. There was good reason why Lira, Peso and Drachma bond markets were tiny and thinly traded — the bonds are garbage.
I know the eurocrats have delusions of forcing mutual issuance and a common border and whatever other daydreaming. But the horse is out of the barn. Netherlands government was forced to abandon Brussels immigration policies in order to stay in power. England already voted to leave. Le Pen is going to switch back to French Francs (or force other candidates to back away from Brussels).
The EU is collapsing. The only question is whether they formally collapse or if they just fade into irrelevance.
The thing is I don’t think it will happen like that. Its very hard for me to imagine collapsed EU or Euro. The total political and human capital invested will mean they will not allow that to happen. Hence, I can’t picture where this will go.
Medex Man said:
@Fish — there are whole books written about the sunk cost falacy.
It doesn’t matter how much effort the eurocrats put into their fantasy world. It only matters that Joe/Jane European Public can’t afford to keep it going now.
The Egyptians put a lot of work into the pyramids; the Romans spent all that time on aqueducts and temples and coliseums. But when the costs of maintaining the empire exceeded the revenue — it didn’t matter what the Pharoh or the Emperor thought
“Somebody” needs to find at least EUR2 trillion behind their sofa cushions, ideally more like EUR3 trillion. I don’t know who is willing to part with that spare change if they had it, but no one has EUR2 trillion lying around so the question is moot.
The only question now is which country will be the last to ignore Brussels — England, Iceland, Spain, Greece, Italy and Netherlands have already openly defied Brussels formally or informally.
For a system to be even slightly sustainable, it must have confidence and at least the illusion of credibility. People are quite used to dealing with corruption as it has always been with us in some level or another, but when that corruption becomes too apparent, then confidence suffers, and there falls the pyramid scheme of wealth “creation” rather than construction.
The ECB can buy everything, but they can’t hide that for long and people WILL notice, and even though they won’t care, they will worry that OTHERS care…and react. These institutions need credibility, at least enough to support even the weakest notion of confidence, and this is a dangerous game as once confidence is lost, it can happen in a moment and take years to reacquire.
Well the responsibility and resulting confidence/ loss of, stops at national level. EU is above legal and cannot be held to account but its legislation is accepted into national laws. So citizens in EU have the experience of what their country being member of EU brings, but it is their nation and politicians that are accountable. Confusing to the average person and very hard to get an angle on.
The same goes for the ECB, its credibility is made up of the nations it hosts and that host it. Few people have knowledge of monetary theory, they notice only that money is provided or not, government spends or cuts back, prices rise or fall, jobs and prospects are there or disappearing and so on. They fail to understand monetary and financial policy, blame their now corrupted politicians, and get upset when demands are made on them according to the agreements that they signed, but are putty all the same. However they do have a sense that Euro is partly responsible, at the same time as being reliant on it now, something which places the burden of confidence directly on themselves – are they going to accept that they have been ripped off and are therefore of poor judgement, that they overestimated their own worth, etc.
It is a vicious trap.
I’m not sure there will always be banks 😉
The ECB will buy up used toilet paper next? All it takes is for that 1 political rating agency to downgrade Portugal to trigger a major crisis.
But “ignorance is strength” and the EU wants its own rating agency.
Anything to fool the markets into perceiving sovereign debt as equally SAFE. Ha! Luxembourg with hardly any debt or Italy & Belgium, it won’t matter, says Super Mario. If he was Pinnochio, his nose would be longer than his arms.
Step 1: sell your Euro bonds.
Step 2: convert your Euros to dollars.
Step 3: buy Pacific coast real estate for bubble prices. US equities same. US bonds same.
Any port in a storm and it’s definitely raining hard in Europe. Cloudy in China too.
It’s a gambler’s paradise I tell ya!
What is the end game?
How does this ultimately return to some semblance of the previous normal?
Seeing what is taking place is one thing, knowing where it’s heading is another.
I do not believe the Euro or EU will fall apart. I’m no fan of either but the will for them to survive is amazingly strong.
Some semblance of the previous norm? What norm? The previous “norm” was multiple bubbles, which, of course, by definition cannot be the norm. After painful transition, we’ll reset to a new norm. hope it’s a good one (or at least as entertaining as the bubble years were.)
Not returning to previous normal under the Euro.
The system that is now installed overrides, runs destructively through as a seperate entity, what is left of previous national management.
It is now either or, we might see a new layer of diplomacy and easing added to scintillate a little bit of sparkle and feelgood temporary relief, but it is headed in the same direction of centralized political control and national dedication to revolve into a fitting formation so as to benefit from the resulting flow of funding now owned by the countries more successful in the Euro arena. The undercurrent is placatory, placidation of demands in return for a ceding of oversight.
Centrally they have the controls now, but are still utterly reliant on national concessions and continued adherence. That is to say EU can be as determined as it likes, but for now it is not in any position to decide on outcomes, its influences under increasing scrutiny.
Well, we can trash any prospects for inflation, and all the debt packed into the system, stagnation and deflation still seems to be the order of the day and probably a long time.
Inflation, deflation, stagflation are ALL destabilization that create opportunity for profit for the very few while everyone else finds that what they have is worthless (or worse, a liability) and everything they truly want and need is increasingly out of reach, and anything that might offer a hedge is uncertain…by nature. And it is NOT an accident.
Medex Man said:
@Fish “I do not believe the Euro or EU will fall apart. I’m no fan of either but the will for them to survive is amazingly strong.”
The eurocrats may have the will to survive, but they do not and never did have public support for the oppressive bureaucracy that they wanted to force on Europe.
England has left. Netherlands government had to abandon Brussel’s immigration edicts to fend off Wilder. Le Pen is leading in France, and wants to reinstate the Franc (she may not win, but she will impact whomever does). Much of France is a police state, and Paris simply is not safe (at least according to their own police). Italy can’t keep a government for more than a few months, and Guillo (spelling?) flat out wants the EU gone. Italy, Spain, Greece and Portugal have serious economic problems. End the eastern European states are openly defying Brussels already. Meanwhile, the Germans are getting fed up with being told they are guilty for being born — there must be a middle ground where Germany doesn’t repeat past aggressions, but new borns aren’t automatically assumed guilty.
Far from bringing Europe together, the EU has driven its inhabitants further apart — while inviting illegal immigrants, operating a corrupt central bank, and issuing regulatory edict after regulatory edict without any democratic legitimacy.
Either the EU collapses or it fades into irrelevance. Europe can have a trade bloc without having a corrupt and aloof central bureaucracy — and everyone everywhere knows it.
I’m not arguing about what SHOULD happen.
Its more a case of what WILL happen.
Hard core Euro zealots won’t be reasonable and Germany sees the Euro and EU as guarantors of their grand childrens prosperity. They will find a leader in Shulz that is EU through and through. German + EU hierarchy will just keep the show on the road no matter what.
I really don’t see anything other than more of the same for the foreseeable future no matter how dysfunctional it appears.
Fish — everything you said above was said about the Soviet Union and the Soviet Block. How did that work out. The governments of most of Europe (similar to the US but worse) are bleeding deficits out of every orifice. Then they came up with the wild ass idea to bring in immigrants to supplement low birthrate when the people they are bringing in think like the 11th century and besides the demand for workers is dropping like a rock due to automation. The European countries will issue debt and the ECB will buy it until it starts resembling the Papiermark. Germans will smell this coming and exit. Remember it was unimaginable in 1913 that there would ever be another large war in Europe because trade between the countries was so interwoven. What is the unimaginable is soon staring you in the face. It starts out slow and then all at once. I have learned the hard way when you start eliminating possibilities you get what you deserve good and hard!
Medex Man said:
@Fish — I am not arguing about what SHOULD happen or what WILL happen.
I am saying it would take EUR2 trillion to prop up the EU “for now”, probably more like EUR3 trillion. No one has that much, so it is not going to happen.
The ECB has been buying time monetizing debts that will never be paid, but they already reached a point where an extra Euro of debt creates less than a Euro of GDP. Printing more currency won’t help (and yes, I appreciate that the US barely gets $1.01 for each dollar of new debt — less than CPI).
Mutliple EU member countries have already openly defied Brussels. Iceland and England both defied Brussels openly. Spain, Portugal, Italy, Greece and most recently the Netherlands have defied Brussels informally. I think every member country including Germany has ignored the Masstrict treaty (at least “temporarily”, but for many its more a permanent defiance). Le Pen, whether she wins or not, is going to push France away from Brussels too. She said she will return France to the Franc (dumping the Euro) if she wins. If Guillo wins in Italy (admittedly a long shot), “Ital-exit” happens. Merkel may still survive in Germany, but she has already been forced to shift away from Brussels on immigration and may have to move further away (defy Brussels) in order to survive — as did the Dutch government.
Brussels is already only “half relevant” — in the opinion of its own member states — and becoming less relevant by the day.
Medex Man said:
Ooops… I meant to write that Iceland and England have defied Brussels FORMALLY (telling Brussels, in writing, to go shove it). Spain, Portugal, Italy, Greece and most recently the Netherlands have defied Brussels informally (by just ignoring Brussels edicts)
Ron J said:
“What is the end game?
How does this ultimately return to some semblance of the previous normal?”
Cycles do not have an end game. They peak and trough. No two decades are the same. The 50’s were not like the 40’s, the 60’s not like the 50’s. With the trough of the Great Depression, the next inflationary cycle began, peaking in 1980. For some thirty years the FED rate bounced lower and lower, to ZIRP. Normal has changed every decade.
Cycles can have trends – each peak and trough being higher or lower than the last.
If not “normal” what is it trending towards?
Look at the recent dramatic devaluation. This will bring welfare losses with a delay of about 2 years. Moreover, this is a one-off stunt which cannot be repeated at Super Mario’s leisure.
Especially now that the ECB does n o t want to raise rates.
(Why isn’t anyone talking about the “curve” here, unlike the FED)?
Looks like they finally got their “2% inflation”. In the real world, we know this has been b.s.: http://davidstockmanscontracorner.com/lies-damn-lies-and-bls-statistics/
It’s not so much WHAT is the end game as WHEN is the end game.
Old Guy said:
Many good comments today. The end game for me anyways is the central banks and large corporate banks owning all debt. All of it. They are trying ways to eliminate cash because the pleebs cannot be allowed to horde their cash under the mattress. Social credit is coming and those that excel will just make more then those on social credit or a basic income.
The end game is governments doling out income to all except the top 25% and even then they may well tax the top 25 to 11% out of existence. Everyone but their money masters will be screwed. The top 10% will have to be on their toes hehe as TPTB may well be in someone’s rifle sights.
Got a find a good stock for rifle sights without buying into the Remingtons of the world that have seen the end of the run.
Ultimately the powers that be simply want a one world order….order. Societies tend to normalize with time, each finding its set of values that sustains it. As the world gets smaller these “tribes” rub up against each other over time and will sometimes war, but the process ultimately brings them closer together. Look at our relationships with Germany, Italy and Japan as some proof. Progressives simply can’t wait. They will force unity to the world regardless of the cost in pain and suffering. No different that every other grand ideology has done. We can’t just allow things to happen naturally as that provides no sense of control, and for progressives, control is the ONLY thing important as all that is good (in their minds) comes from it.
Would agree with that being the case & in the EU situation they would see economic pain as preferable to the pain of war between member states which was the natural order not so long ago.
Hence, I don’t see any change being likely. As the single largest global market with the 2nd most widely traded currency they have enough firepower to keep the show on the road.
What we think should happen is irrelevant, what will happen is the important element that is unpredictable.
I would have no surprise to see substantial financial transaction taxes be introduced. You do anything with capital to try and eek out a gain and it will be hit to help support the system they think you are exploiting or operating against.
Caledonian Calaban said:
“Would agree with that being the case & in the EU situation they would see economic pain as preferable to the pain of war between member states which was the natural order not so long ago.”
Agreed. This debacle has hardly even begun yet. There simply is no popular or political will in the EU other then to continually try and reform the irreformable. The spectre of a europe-wide conflict is too terrible to contemplate. If I was in the prediction business I would speculate that, like much of the interwar period, most of the large member states will slowly descend into political polarisation and extremism, increased poverty, social breakdown and low-level civil war. But it will probably take another generation, at least, to play out. Economically, the die has already been cast as most of the posters here have already stressed. What is key is what sort of new political class arises to cope with new economic realities. I doubt if any of the current crop of populist contenders have the abilities necessary; something which most voters instinctively know and thus feel queasy about.
Fata volentem ducunt, nolentem trahunt
There is a real disconnect going on. The stock market, dollar and currency movements say trump policies are good for anyone looking to make money or park assets in a stable environment. The press and politicians act like America is on the verge of implosion under President Trump. Securing borders, stopping illegal immigration and being a law and order candidate is evidently a bad thing. I am sure most republicans hate trump as bad as democrat politicians, they are just too afraid to speak out. They know he is going to decimate agencies whether he gets the budget he wants or not.
Let s buy the strongest stxx leading stxx in the strongest country lets buy american stxx and enjoy life watching fox friends and jim cramor on cnbc sqwak box
Even cramer has hedged his prophetic record by announcing a possible crash.
OT: on a Syrian website, I read that they shot down an Israeli fighter plane in Syrian air space? Not a word by the MSM. Which has done a perfect job shielding the Joe Public from the real exonomic issues.
Copito (@copito61) said:
Wow – so the US is gradually ramping up interest rates whilst the EU is sinking by the bow and EU interest rates are equivalent-negative, and all the money is flooding out of Europe to take advantage of higher interest rates in the US…
Completely counter-intuitive, really; whodathunkit?