The Corona Bond may be the perfect fit to propel European businesses: Timing is Everything

File Photo: European Commission President Ursula Von Der Leyen and European Council President Charles Michel give a joint press conference after a video conference of the European Council on EU action on Coronavirus, COVID-19, at the European Council, Brussels, Belgium. EPA, STEPHANIE LECOCQ




By Ioannis Kantartzis (*) and William Gianopulos(**)

This week, some of the worst affected countries in the EEC from the Coronavirus (1) announced they were brainstorming to launch a so-called Corona Bond to help pump liquidity into a community that needs capital–quickly. We suspect the target for these proceeds will be the private sector. Contrast this to the ECB’s decision, approved this week, to provide 750 Billion Euros to European governments to sustain them through the crisis.

  • It remains to be seen whether Germany will endorse the effort to go ahead with the new bond, but early indications suggest Germany prefers to focus on governments in urgent need of assistance, and to ‘pass’ on the private sector Corona Bond until more evidence supports the effort. Once again, Europe’s bureaucrats in Brussels are showing their ability to halt the wheels of progress, particularly for business.

The development of the Corona Bond comes at one of the best moments in recent memory, particularly as we consider both prevailing interest rates and the possibilities for global syndication. As anyone in the business knows, creating a supply of bonds is one thing; finding demand is quite another.

  • Shakespeare is famous for his line in Julius Caesar, “The fault, dear Brutus, is not in our stars, but in ourselves.” In the case of the Corona Bond, the stars may be telling us something rather important.

Just this week, across the Atlantic, at least three important developments dovetailed, boding well for the launch of such a bond. First, short term interest rates known as US Treasury Bills (90 days money) dropped into negative territory for the first time ever. The notion of US banks and governments taking money from savers–mainly retired pensioners–is now a reality, mirroring the experience in Europe.

  • Also this week, the US Treasury, like the group of European governments looking to launch the new bond, announced they were exploring the issuance of a new 50 year US government bond, moving well beyond tradition. Today in the US, the 30 year bond is the longest duration traded to date. We now see governments—and corporations–trying taking advantage of historic low rates and extend their duration well beyond the norm, to capture the greatest value. It’s a smart move at a perfect time.

Finally, and adding to the intrigue, we are looking at the possibility that the US Treasury is no longer so willing to countenance a strong Dollar policy. Indications suggest the US Dollar might just be approaching a temporary top vs the Euro. Combine these ingredients and consider the following scenario: You’re a US Pension Fund looking to buy government bonds or bills, and can find only negative interest rates from US Treasuries. Further, you are concerned about the intermediate prospects for the US Dollar and want to diversify your currencies into the global markets to improve your risk profile.

  • The Corona Bond could be just your ticket. If the dollar falls, your Euro based bonds perform well, even with a minimal or zero interest rate. Indeed, we suspect US banks and pension funds would be the first investors knocking on the door for this new European bond.

Once the air clears with the virus, we see a bottom forming in equities. More to the point, with prices dropping dramatically in recent weeks, we now see gradual greater value for most European assets than we have witnessed in years (we do not of course discard further retesting of the recent lows, however this is a separate discussion depending on the risk profile of each investor as well as his/her time horizon). The Corona Bond may be the perfect fit to propel European businesses that wants less dependence on government. Germany needs to climb aboard the train, or miss the next stop in a market that is almost certain to surprise everyone on the upside.

1 Corona Bond issuers include: Greece, Belgium, Ireland, Italy, Luxembourg, Portugal, Slovenia and Spain.

(*) Options strategist and co-owner of TRADERS’ magazine, www.ikantartzis.com
(**) Managing Director Artex Value Limited

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