by Michael Haltman, Hallmark Abstract Service LLC
This chart shows the May 18, 2012 10-year sovereign debt yields for the United States, Japan, and the five EU PIIGS (Portugal, Ireland, Italy, Greece and Spain)!
Yield spreads between the countries were at these exaggerated levels (although improved for most from the depths of the global financial crisis) due to continued concerns over the ability of these weaker EU economies to manage deficits, access the credit markets, improve economic growth and of course stay solvent in the face of demands for austerity.
10-Year Sovereign Debt Yields as of May 18, 2012
At the same time the Portugal 10-year yield was north of 10% and in Ireland up at around 6%.
Those yields were then and here they are now!
Fast forward to today’s market and this is the current 10-year yield scenario for this sovereign debt:
Why the vast improvement in spreads to US government debt that in the case of Ireland is less than 30 basis points and, more importantly, is is sustainable?
Certainly the ability for these countries that have had limited to no access to the capital markets for years to now have that outlet for raising cash is a huge step forward.
But, as this tongue-in-cheek April 4, 2014 quote from the website Zero Hedge posits, are these yield improvements merely smoke and mirrors or sustainable?
‘It seems there is a lesson here for all… push your unemployment rate to record highs, loan delinquencies to record highs, and depress your people to record high suicide rates… and voila… low cost of funding is guaranteed (surely there is a recipe here for Ukraine or Turkey or…)
Oh, and you absolutely must have a central banker with a ‘promise pony’.
As we anxiously await the outcome of AQR (Europe’s Stress Test) we can only imagine the bloated balance sheets of European banks stuffed with the domestic bonds that the crisis has now created and made the entire banking-system-sovereign-stress relationship inseparable.’
And this April 9 analysis from Barron’s.
‘In financial markets, the names Italy, Greece and Spain still conjure knee-jerk images of highly troubled peripheral euro-zone economies that only recently teetered on the brink of default. After all, they represented the letters I, G and S of the PIIGS acronym (joined by Portugal and Ireland) that for years became easy market shorthand for troubled European sovereign debt.
How quickly things change – at least with the help of the bottomless benevolence of central banks. Today’s Wall Street Journal highlights how surging investor demand has pushed Spanish and Italian 10-year bond yields (each now around 3.2%) within just half a percentage point of comparable Treasury bond yields. And the yield on 10-year Greek government bonds dipped to 5.921% today, per Tradeweb data, its lowest since December 2009. This for a country with a credit rating that’s still deep in junk territory.’
Of course we will only know the answer to the question of price and yield level sustainability as time moves forward because, as with all things investing, only time will tell and past performance (and prior government action) is certainly no guarantee of future results!