So here we are again. Sovereign yields of the problem children in the European Union are on the rise again. The chart above shows the yields on the Greece Generic 10 Yr Bond in Orange and the yield on the Irish Generic 10 Yr Bond in white. As you can see on the chart, the Irish 10 yr yield has risen to a new high of 6% (before backing off a little bit today) and the Greek 10 yr is approaching the high water mark. As a reminder, bond prices are falling as the yields rise. This fall in bond prices and rise in yields not only hurts investors who own these bonds, but more importantly it increases borrowing costs for these nations, and makes it harder for them to service their bulging debt loads.
This recent wave of yield pressure is due to skepticism surrounding whether Ireland can reign in the ballooning deficit and support the local banks. In the short term the recent announcement to split the Anglo Irish Bank into a ‘good bank’, which will deal with deposits only, and a ‘bad bank,’ which will deal with the bank’s loan assets, was well received by the market. The markets also started the morning celebrating that a Norwegian Sovereign Wealth Fund had purchased government debt of these struggling nations. Of course, whether or not this was a prudent decision over a slightly longer time frame than one day is still to be determined.
At the beginning of April, I last wrote on the sovereign default fear that was present in the system. At the time, the equity markets had not yet responded to the turmoil brewing in the bond markets, but within the next few weeks the equities started to decline, on their way to a 20% fall in the MSCI EAFE (broad index of international stocks concentrated in Europe). And now once again we have to ask ourselves, ‘are equities the last ones to get it?’
