The Daily Update - EU Squabbling/Bund Arbitrage

It was a long night for the European Union’s leaders as they continued to squabble over who will take up the baton shortly for positions such as new European Parliament and the European Central Bank heads, as well as the EU’s chief diplomat in Brussels. How ruthless the EU should be on its climate change goals was also a major sticking point.

Both Berlin and Paris have vested interests naturally, especially over who should take over as the executive of the European Commission later this year, not least because the position acts as the EU’s competition watchdog. This includes everything from monitoring member states’ budgets to proposing policy across a broad range of areas, from technology regulation to climate change. It seems as though Manfred Weber, a centre-right German has got Merkel’s backing, whereas Macron wants a more liberal and socialist spearhead.

One area that both Macron and Merkel are on the same side is that of aggressive climate change legislation. However, many EU states are pushing back against the idea of committing the EU to net zero carbon emissions by 2050.

In other news, it would appear that the German Finance Ministry has been offered a great trade opportunity helped by the comments of ECB President Draghi earlier this week.

The trade is to arbitrage issuance of German debt with Buying Italian debt. Only six conventional German Bunds out of the 57 in issuance have a positive yield, for the moment, with all the 6 over 20 years to maturity. So the Ministry can issue out to 20 years offering investors a negative yield and use the proceeds to invest in Italian sovereign bonds for a pick-up of around 2.45% at a ten years maturity. Alternatively, the Ministry could issue debt and use it to boost fiscal expenditure as it gets paid to do so. A sure winner with German politician’s as they all seek for votes.

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