Ten-Year Sovereign Debt Yields: a Tale of Contrasts

August 4, 2011

Ten-year bond yields in Euroland members with troubled fiscal situations remain in the stratosphere.  The ECB was compelled to resume bond buying today in light of premiums versus German bunds that yesterday stretched to more than 1200 basis points in Greece’s, above 900 bps for Portugal, over 800 bps in Ireland, and nearly 400 bps in the cases of Spain and Italy.  Belgium’s premium was slightly more than 200 basis points.

Not all fiscally troubled governments have sky-high bond yields, however.  The table below compares present 10-year Treasury, bund, gilt and JGB yields to their 2011 highs, mid-2011 quotes, and their respective five-year averages.  Daily closing rates were used to construct this matrix.  Three of the four countries, excepting Germany, are prolific deficit spenders.  The table reveals two common traits.  First, yields crested this year below their five-year averages.  Second, rates are presently well below those highs and, in three of the instances, over half of the decline has occurred since June 30.

  Now 2011 Highs Mid-2011 5-Year Ave
U.S. 2.47% 3.69% 3.16% 3.71%
Germany 2.30% 3.49% 3.02% 3.53%
Britain 2.68% 3.88% 3.38% 4.11%
Japan 1.02% 1.34% 1.14% 1.42%


Politicians in search of austerity thought they were following the market’s marching orders but didn’t listen carefully.  Investors want to see debt burdens reduced but are frightened because the first rule of successful fiscal consolidation to ensure continuing positive economic growth has been ignored.  Soaring gold prices represent a vote of no confidence in the business outlook but also distrust in market capitalism and political democracy.  Geographic diversification, as in 2008-09, has failed to protect paper wealth.  Share price indices have fallen similarly since late April.  The DJIA, S&P 500, and Nasdaq have lost 9.8%, 10.4% and 9.3%.  The Japanese Nikkei and British Ftse are each 10.9% weaker, and the German Dax is down 14.9%.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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