Investors have focused on Spanish bond yields as an important indicator of financial stress in Europe. Spain has seen its borrowing costs rise as the sovereign debt and banking crises ravaging the European periphery threaten to infect more and more economies.
Months ago, we pointed to Spanish two-year yields as an indicator of urgent financial stress, the kind of angst that could cause the country to need a full-blown bailout like that of Greece, Portugal, and Ireland. Two massive liquidity operations—three-year LTROs—from the European Central Bank diminished the prospect of immediate catastrophe.
Faith in these measures was reflected in the widening gap between Spanish 2-year and 10-year lending. Because banks could borrow money at incredibly cheap rates from the ECB, they had big incentive to make money off of high Spanish yields but less incentive to purchase 10-year Spanish debt as the future remained uncertain.
However, the spread between these two maturities has narrowed dramatically within the last week, indicating that investors no longer believe the ECB’s liquidity measures will have any significant effect. Spanish 2-year yields rose 77 basis points to 6.53 per cent while 10-year yields were up 23 basis points to 7.50 per cent.
A look at this spread in the last year reflects moments of particular crisis in Europe, serving as a sign that investors have rejected Spanish bonds altogether—i.e. loss of faith in the sovereign—rather than uncertainty about the long-term health of the eurozone:
As a bonus, we tracked both yields side by side:
Photo: Simone Foxman/Bloomberg Data