Wednesday, November 2, 2011

Global 10-year bond yields: Read'em and weep!

BREAKING NEWS (NOVEMBER 3, 20011): "Italian 10-year bond yields rose to 6.399 per cent, while the extra premium the country pays over Germany jumped to 459 basis points." (FT)

Or better yet, read'em and try not to lose sleep!

The world knows only too well the crisis that is currently consuming Greece, the rest of the EU and by extension the globe.

A huge two-day drop in the global markets is a testament to that fact.

Will there, as called for by Prime Minister George Papandreou, be a referendum vote in Greece to allow the people to decide the fate of the European debt deal?

And, at the end of the day, will it really matter anyway as there is little confidence that Greece can be successfully pulled back from the brink? The only thing most likely to occur is a putting off of the inevitable.

But what about other members of the EU, such as the rest of the PIGS, who are also in major trouble?

The debate over what it is the Greek haircut will be called!

Would an imposed haircut on Greek debt be considered an event of default and thereby trigger the credit default swaps on its bonds, or will it be considered something else in an attempt to avoid the consequences the term default would bring on?

While avoiding the mechanism of a default, the unintended consequences for other sovereign debt issuers could loom very large.

For debt buyers, if credit default swaps are shown to have been worthless when purchased on Greek bonds, why would they have the confidence to assume they would be viable on other sovereign debt?

And if Greece is so easily able to slash their bonds by 50%, why not other countries as well?

The end result will be that buyers of EU sovereign debt will demand much higher yields on the bonds that they buy, potentially dealing a death blow to the ability of these affected countries to service their debt. A type of self-fulfilling prophecy.

The chart above shows some of the 10-year yields being demanded on bonds for issuers such as Italy (6+%) and the spread to the bonds of Germany.

If it continues or gets worse, I believe that the term that will be used is death spiral!

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