Over the past year, in sharp contrast to US, UK and Euro Core bond yields, yields on Greek, Spanish and Portuguese government bonds have stayed in the downward trend started in summer 2012 (on Draghi's OMT). Since the start of the year, they dropped even lower. January 7th marked the succesful return of Ireland to the bond market. Ireland raised EUR 3.75 billion with an issuance of 10-year bonds that was nearly four times oversubscribed. That day, the Spanish, Portuguese, and Greek stockmarkets had another big rally strengthening the technical picture for their benchmark indices. Two days later it was Portugal's turn to tap the market for the first time in a long time. For investors, betting on a European recovery has worked surprisingly well. In government bonds, the trade of 2013 was going long the bonds of the PIIGS states and shorting core economies' bonds as a strengthening economy meant higher bond yields in Germany for ex. and less concerns over the financial position of the PIIGS, therefore lower yields for their bonds.
The recent developments have prompted Jose Manuel Barroso to reaffirm his optimism on the state of the Euro Zone, the euro is no longer facing an existential threat according to the European Commission Chief. What does it all mean for investors ? The technical picture indeed tells us that, for the time being, risk has abated across European markets. You may think that not much has changed in terms of structural problems in Europe, and you would be right but there is no sign of storm ahead for European markets. To the contrary, yields seem to confirm the bullish signs in stocks, indicating a period of "moderation" ahead .
Whether this is just a respite or a real inflection point, only time will tell, but for the next few months the current feeling of
Tout va bien dans le meilleur des mondes should persist. Draghi's OMT trick has succeeded in sweeping all the problems under the rug, which of course has the unwanted side effect of making politicians extremely complacent, Euro Zone political reforms are at a standstill. But none of that matters, for investors and speculators things are looking up.
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| Govt Bond Yields as of 01/10/2013 Data Bloomberg |
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| Greece 10 Year Data Bloomberg |
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| Portugal 10 Year Data Bloomberg |
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| German 10 Year Data Bloomberg |
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| Switzerland 10 Year Data Bloomberg |
