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is the european government bond market really having a liquidity issue? corporate and munis were never liquid basically anywhere. bagholders still get payouts f

is the european government bond market really having a liquidity issue? corporate and munis were never liquid basically anywhere. bagholders still get payouts from the borrower, so unless they default which hasn't happened yet, people still make a profit. the maturities and monetary policy are such that they can just rollover to a new issuance in the future so it isn't clear that there is really any near term issue that money injectors can't manage, AT LEAST FROM the things you mentioned. I could think of other things but I'll leave you to come up with the succinct argument

joeyrideout 7y ago
Bond market liquidity isn't the same as defaults. It just means that the ECB is having trouble finding buyers for their bond paper as their QE program ends. This points towards a gap down in bond prices and a gap up in interest rates. Defaults will come after. EDIT: The key distinction I'm trying to make is the difference between solvency (debt repayment ability) and liquidity (in a market, the bid-ask spread or whether you can actually transact).
- caprese 7y ago
  Yeah, I didn't conflate these concepts. Back to the question: Why do you think there is a problem when the ECB can hold bonds till maturity? Central banks have an infinite time horizon, they are upgraded sovereign wealth funds. The issuers themselves can just rollover and create new bonds when their old bonds are reaching maturity, if they haven't paid them all off yet. This is commonplace. If they fail at having enough revenue or getting investor appetite for a new issuance then they default. There are criticisms possible about central bank behavior, but as far as stability to the financial system what problem do you think there is? Central banks haven't been in the habit of actually unwinding their portfolios into an illiquid market, and their large bond holdings can just be repaid by the issuer.
  - joeyrideout 7y ago
    Sorry, upon re-reading you did not conflate the two. My understanding is that there are few or no private bids for bonds at current interest levels. As you probably know the ECB recently announced an end to QE. Rolling over debt at an interest rate set by the private market is not sustainable. So, the ECB is somewhat trapped. They either renew QE or expose themselves to very high servicing costs set by private buyers. Hopefully that's clear as mud? Maybe I m missing something.
    - caprese 7y ago
      > Rolling over debt at an interest rate set by the private market is not sustainable. So, the ECB is somewhat trapped. The issuers roll over debt at their own discretion. The ECB only has the risk of some issuers defaulting before those issuers pay the ECB back in whole, and to offset that risk the ECB limited the universe of eligible assets to as low as a BBB rating. I think it is merely embarrassing for an institution that uses public money to experience defaults, but it is accountable to no one and it creates that public money. It is more like a human-productivity futures contract. And yes, if the ECB really feels at risk then it can lower the target interest rate deeper negative, and issuers will issue new debt at even more attractive rates since the money is free. Yes, this is your renew QE scenario. The ECB is not trapped, the private wealth is. Sure, it is a monetary policy twilight zone, but I think the market tolerance and financial market outcome is not as dire as is often reported. The worries are hyperinflation, but this is a currency term that would be called dilution in other asset classes. Managed dilution of a currency-share is what they are doing. The other worry is balance sheet unwinding, but central banks don't need to do that and can completely distort the market so that their position is profitable anyway (further dilution lowering interest rates so that the issuer can rollover debt instead of defaulting). The last worry is market intolerance to that currency's monetary policy, but the whole world is doing this right now there is nowhere for private money to go except crypto and art.

joeyrideout 7y ago

Bond market liquidity isn't the same as defaults. It just means that the ECB is having trouble finding buyers for their bond paper as their QE program ends. This points towards a gap down in bond prices and a gap up in interest rates. Defaults will come after. EDIT: The key distinction I'm trying to make is the difference between solvency (debt repayment ability) and liquidity (in a market, the bid-ask spread or whether you can actually transact).

caprese 7y ago
Yeah, I didn't conflate these concepts. Back to the question: Why do you think there is a problem when the ECB can hold bonds till maturity? Central banks have an infinite time horizon, they are upgraded sovereign wealth funds. The issuers themselves can just rollover and create new bonds when their old bonds are reaching maturity, if they haven't paid them all off yet. This is commonplace. If they fail at having enough revenue or getting investor appetite for a new issuance then they default. There are criticisms possible about central bank behavior, but as far as stability to the financial system what problem do you think there is? Central banks haven't been in the habit of actually unwinding their portfolios into an illiquid market, and their large bond holdings can just be repaid by the issuer.
- joeyrideout 7y ago
  Sorry, upon re-reading you did not conflate the two. My understanding is that there are few or no private bids for bonds at current interest levels. As you probably know the ECB recently announced an end to QE. Rolling over debt at an interest rate set by the private market is not sustainable. So, the ECB is somewhat trapped. They either renew QE or expose themselves to very high servicing costs set by private buyers. Hopefully that's clear as mud? Maybe I m missing something.
  - caprese 7y ago
    > Rolling over debt at an interest rate set by the private market is not sustainable. So, the ECB is somewhat trapped. The issuers roll over debt at their own discretion. The ECB only has the risk of some issuers defaulting before those issuers pay the ECB back in whole, and to offset that risk the ECB limited the universe of eligible assets to as low as a BBB rating. I think it is merely embarrassing for an institution that uses public money to experience defaults, but it is accountable to no one and it creates that public money. It is more like a human-productivity futures contract. And yes, if the ECB really feels at risk then it can lower the target interest rate deeper negative, and issuers will issue new debt at even more attractive rates since the money is free. Yes, this is your renew QE scenario. The ECB is not trapped, the private wealth is. Sure, it is a monetary policy twilight zone, but I think the market tolerance and financial market outcome is not as dire as is often reported. The worries are hyperinflation, but this is a currency term that would be called dilution in other asset classes. Managed dilution of a currency-share is what they are doing. The other worry is balance sheet unwinding, but central banks don't need to do that and can completely distort the market so that their position is profitable anyway (further dilution lowering interest rates so that the issuer can rollover debt instead of defaulting). The last worry is market intolerance to that currency's monetary policy, but the whole world is doing this right now there is nowhere for private money to go except crypto and art.