Greek-German Spread Update

Below is a chart that we discussed during our Inside the Investment Committee presentation. It is the yield of a 10 year Greek bond (orange line), the yield of a 10 year German bond (white line), and the spread between the two (yellow line in the second panel). The German bond is generally considered the safest bond in the Euro zone, and the spread allows an investor to gauge the risk level in other countries. When the spread moves higher it means that the yield on the Greek bond is moving higher when compared to the German bond, or the country is seen as riskier. And as a refresher, when yields move higher bond prices fall and when yields move lower bond prices rise.

When we showed the chart at the beginning of March the spread had been narrowing, or Greek bond prices had been rising when compared to German bonds. That was due to rising expectations of a bailout for Greece by the other Euro member states. However, over the past month the bailout has not moved forward and the spread has jumped right back to the highest point since the adoption of the euro. The bond market is definitely signaling concern over Greece’s ability to reign in this debt crisis and avoid defaulting on their bonds.

And that brings us to the equity market. This latest move higher in Greek to German spreads has been of little concern to equity traders and this has certainly intrigued me. During the last spike in January, equity markets sold off close to 10% as fiscal fear spread throughout investing circles. So are we worrying too much about the fallout from sovereign default, or are equity traders the last ones to get it?