Friday, November 25, 2011

More Evidence the EZ Crisis is Moving to Germany

The German CDS, which is insurance against a default by the German government on its debt, is seeing its biggest ever widening today: +15 bps to 126 bps. Now 20 bps wider than the UK.

Although some have argued that the recent climb in German bond prices is the result of a greater fear of inflation, the climb in the CDS is evidence that the real fear is a climbing fear of default. The CDS only protects against default, not inflation.

4 comments:

  1. more ammo for Merkel to pitch to the public for ECB intervention...

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  2. Although some have argued that the recent climb in German bond prices is the result of a greater fear of inflation

    RW, I hate to be that guy, but if inflation fears increased, then wouldn't bond prices FALL, in order to realize a higher nominal return to compensate for the inflation? Bond prices rise when inflation fears decrease, all else equal.

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  3. @Major-Freedom

    And you think all else is equal? Wenzel is pointing out that the German CDS is also up, that doesn't have anything to do with inflation, only fear.

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  4. Practical, you're missing the point. It's not that I actually think all else is equal. I'm talking about the theoretical point RW made.

    If there is a growing fear of inflation, and this fear is going to be translated into a change in bond prices, then bond prices must FALL, so that the rate of return goes up, in order to compensate for inflation expectations.

    If CDS on German bonds go up, then that means there is a higher expected probability of default. If bond prices are going to change on this news, then bond prices should ALSO fall.

    Bond prices rising is a sign of low risk and low inflation expectations.

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