Sovereign Bond Yields

The FT this morning discusses the state of the bond markets for the ‘weaker’ eurozone economies: Italy, Greece, Portugal. As expected interest differentials between government debt in these countries and German debt is widening, but only slowly. Italy is being evaluated at present as the weakest member. As the FT points out the temperature of the water will be tested again this week when Portugal issue a new batch of debt:

The expected launch next week of a new 10-year benchmark bond by Portugal, whose credit rating was recently downgraded by Standard & Poor?s, is set to test investors? appetite for debt issued by weaker eurozone members.

Portugal, which on Friday appointed bankers to manage the syndicated bond sale, will be competing for demand against France, which enjoys the highest credit rating available and plans to auction a new 10-year bond of its own next week.

Bond spreads of Portugal, Italy and Greece – the three weakest countries in the eurozone – widened marginally on the back of this. On the week, the spreads of bonds of Portugal, Italy and Greece, widened by just 1.3bp, 0.5bp, and 0.5bp, to stand at 8.3bp, 21.5bp, and 24.5bp, respectively against Bunds.

But they have been widening for several months. Spreads of Italian 10-year paper, for instance, have doubled from 11bp to 21.5bp against the Bund in the last four months.

This entry was posted in A Few Euros More, Euro and tagged , , , by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

5 thoughts on “Sovereign Bond Yields

  1. I read somewhere that the ECB has a policy of accepting all Eurozone govt paper on an equal basis, which would restrict the ability of variation in bond yields to reflect variation underlying creditworthyness.

  2. “I read somewhere that the ECB has a policy of accepting all Eurozone govt paper on an equal basis.”

    I suspect you are right here. But the ECB is not a big player in this area. I think I am right in saying that this is only a question of the reserves it holds on behalf of the relevant central banks, and since the only central bank likely to be passing off Italian govt paper at par would be Italy, and since Italy can hardly put up only it’s own govt paper, this is only going to involve a minute fraction of all the money Italy has to raise. Imagine you want to buy a house, and your best friend will give you an interest free loan on 3% of the total asking price, well, you still have a lot of work in front of you. The real issue might be what obligations the other eurozone central banks might have (these might be implicit political ones) to buy Italian paper in a high pressure situation.

    There are still lots of mysteries about how all this works, and will work. For example, the ECB doesn’t intevene in the currency markets, but the member states have autonomous central banks, and they are not inhibited from so doing.

  3. “Then the bad debt will pile up at the ECB”

    Not if it earmarks Italian paper as part of Italies reserve deposits at the bank it won’t since these remain the property of the Bank of Italy. I mean if Italy ever left, it would be returned to its owner.

  4. How would they make sure that the amount of Italian debt held will not be larger than Italy’s due share of the reserves?

Comments are closed.