ECB’s Asmussen raises concerns over fixed income pricing analysis

Jörg Asmussen, member of the European Central Bank’s executive board, has criticised investors for failing to price fixed income instruments accurately before the financial crisis, and reiterated his employer, now battling to keep lending markets accessible by all member states, has only one mandate – price stability.

The German politician’s criticism came as the market’s differentiation of debt instruments has sent German 10-year Bunds yields to 1.35%, while equivalent Spanish debt yields 5.9%.

As investors have sought out the safe creditor of Berlin, and come close to shunning the relative risk of Madrid this year, long-dated Bunds have only yielded above 2% on four trading days, whereas Spain’s debt has only yielded less than 5% on nine days.

Speaking at the annual risk management conference of German asset manager Union Investment on Wednesday, Asmussen said it was “quite worrying to see that in the years hardly anyone priced government debt [properly], it was all priced too high”.

A more varied analysis only came in 2008 “when people looked at government bonds in more detail. The evaluation of risk was not always done with necessary due diligence, so in the extreme situations the risk premium for solvent debtors reaches dimensions that can lead to insolvency, and this exaggeration can be a risk itself.”

Asmussen said the crisis had revealed a number of main risks to economic growth and stability in the system.

The first was the effect public deficits and imbalances could have on the private sector and employment. A second was the risk instability in the financial sector could have on the government bonds, and vice versa.

In ensuring member states can borrow from public markets, or that those that cannot secure adequate centralised financing, Asmussen said the ECB’s “prime mandate has always been to ensure price stability in the entire Eurozone”.

When questioned on how the ECB would tackle the Eurozone’s looming pensions crisis, and/or inflation, he reiterated numerous times that ‘price stability’, defined as CPI below 2%, was the ECB’s mandated goal.

“We have achieved this in the past and will continue to guarantee it.”

All the ECB’s ‘unorthodox’ measures had as their aim “to eliminate the distortions that have emerged in financial markets, and which now manifest themselves in very high risk premia and negatively impact the integration of financial markets. We want to remove the so-called tail risk from the market”.

Asmussen added ECB unlimited bond buying had tail risk removal as “its whole purpose”. He said the program was unlimited in volume “because any limit would be tested by the market anyway”.

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