Don't Look Now But European Yields Are Sneaking Up

We’ve been hearing a lot about changes in sovereign bond yields this morning, particularly in Spain and Italy, as an indication of risk perception about the two countries.

Both Italian and Spanish yields are rising, but the action has been limited so far today. Indeed, Spanish and Italian 10-year yields are up just 2 and 5 basis points today, respectively.

Even so, it makes sense that both these securities will continue to rise amid renewed concern over the sustainability of these countries’ debts and banking systems. A look at what’s been happening over the last month indicates a handful of things:

  • Spain’s banking sector problems are more worrisome than Italy’s massive public debt.
  • Investors doubt both countries’ abilities to grow out of their problems.
  • Enthusiasm from the European Central Bank’s two three-year LTROs is fading (note that the turnaround comes in early March for both)—at least for now. Yields on 10-year bonds topped an important benchmark—5.0%—for both countries and rising.

Confirming this risk-off trend, German bunds set for biggest weekly loss this year, according to Bloomberg TV.

Check out the 1-month chart for Spanish 10-year notes:


Photo: Bloomberg

And the Italian 10-year:

Photo: Bloomberg

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