LIVE MARKETS-Euro bonds, Ukraine peace plan and Russian frozen assets
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EURO BONDS, UKRAINE PEACE PLAN AND RUSSIAN FROZEN ASSETS
The reaction of government bond markets to a possible peace deal in Ukraine has been quite muted, as the main driver is the likelihood of the ECB keeping monetary policy on hold.
However, one part of the plan caught investors’ attention: the proposal to invest frozen Russian assets in “U.S.-led efforts in Ukraine, with the U.S. receiving 50% of the profits,” while Europe would contribute an additional 100 billion dollars toward Ukraine’s reconstruction.
“While the last word on this point has, of course, not been spoken, this would increase the unfunded reconstruction bill for Europe, arguing for more long-end steepening,” says Christoph Rieger, rate strategist at Commerzbank.
He also notes the “funding requirement will already increase strongly due to the fiscal expansion.”
Ultra-long yields typically rise more than those at the shorter end of the curve -- a process known as steepening -- when markets reflect increasing concerns over the long-term sustainability of public debt.
However, Citi analysts say the option proposed by the U.S. wouldn’t be acceptable to the Europeans and hence not plausible as the majority of the assets are held by them at Euroclear.
They instead envisage a plan that “would not increase the EU funding needs as it would entail a swap of Russian assets at Euroclear to a zero-coupon EU bond that could be rolled off indefinitely.”
“That said, we believe the latest developments could increase the likelihood of the EU’s plan to use the frozen Russian assets being implemented given the initial U.S. proposal,” they argue.
(Stefano Rebaudo)
FOR TUESDAY'S OTHER LIVE MARKETS POSTS:
STOXX 600 STEADY, EARNINGS MIXED BAG CLICK HERE
EUROPE BEFORE THE BELL: FUTURES FAIL TO CATCH FED RATE CUT HOPES CLICK HERE
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