Time to fear the bubble on EU risky debts

Posted on 20. May, 2014 by Jean Jacques Ohana in Weekly Focus | Comments Off

May 20, 2014

We had recommended long positions on EU sovereign debts on several key occasions since April 2013. Their trends have increasingly grown mature and our bubble indicators have significantly expanded since the start of 2014 onwards. All the most significant investment bubbles are now concentrated in the euro zone, either in peripheral or high yield debts (figure 1). As a matter of fact, the spread between Italy and Germany has started to widen again after a smooth convergence (figure 2).

The most significant herding positioning is present on the credit part of debt and not on interest rates levels, as the Radar remains constructive on core safe havens debts (figure 3).

As illustrated in figure 4, the last times high yield bonds flirted with dangerous levels (above 70%) were in 2010 and 2013 just before sharp corrections. Bubble indicators on peripheral debts and high yield bonds have moved in sync as showed in figure 5.

Should the bubble burst, it could have significant impact on other sovereign debts and EU high yield debt as showed by the dependency graph of Italian debt (figure 6). In short, it could trigger a replica of the euro zone crisis.

Figure 1: The Radar’s ten most significant bubbles.

Figure 2: 10-Yrs Spread between Italy and Germany in %


Figure 3: The Radar’s scores on sovereign debts.


Figure 4: Riskelia’s bubble indicator on EU High Yield Debt and High Yield debt total return price.

Figure 5: Riskelia’s bubble indicators on risky EU debts.

Figure 6: Assets related to Italian Government Bonds. A link goes from asset A to asset B when the dynamics of A have a significant explanatory power on the dynamics of B. Edges are labeled with the correlation values.

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