Germany’s debt chief has some words for investors battered by price swings and thirsting for more liquidity: Relax guys, we’ve seen worse.
When international bonds sold off in April, a surge in volatility was attributed by investors partly to the European Central Bank sucking liquidity from the market via its debt-purchase program. Those concerns aren’t shared by Tammo Diemer, head of the nation’s Federal Finance Agency in Frankfurt, who says the price gyrations in Germany coincided with increased trading. That would indicate the market doesn’t need fixing.
“The price-building process based on supply and demand is still working very well,” Diemer said in an interview at the Euromoney conference in London. “Volatility may have picked up in April, but that’s still low compared with what we saw in 2008 and 2010, in the aftermath of the financial and the debt crises.”
While Diemer said there were suggestions that new regulations are curbing market-making activities among banks, he found little evidence indicating the German market is distorted by declining liquidity.
“If you look at the German bond curve, there are no particular bonds that are out of line with others. This probably suggests there is no price distortion,” he said. “What we have seen is intraday volatility. But that doesn’t mean supply doesn’t meet demand at the end of the day or the week.”
This year, investors already were coping with price and liquidity pressures caused by the ECB’s 1.1 trillion-euro ($1.2 trillion) bond-buying program when the selloff began. The rout sent the price of Germany’s 30-year bond plunging 20 percent in just 16 days through May 13.