This past week, Greece made its triumphant return to global financial markets, with its successful floatation of a 5-year bond offering. In total Greece borrowed $US4.16 billion at a rate of 4.95%.
But Greece’s success is just a small slice of a much bigger story, which is the incredible appetite for European sovereign debt.
The above chart goes back 5 years and it shows borrowing costs for several European countries, including the US (in grey). Probably the most striking lines are the Italian and Spanish ones (yellow and blue). At current trends, it won’t be long until Italy and Spain are borrowing for less than what the US does for 10 years.
So what’s the story?
There’s a few things going on.
One is that in the summer of 2012, with the Eurozone crisis raging, Mario Draghi issued his famous three words “whatever it takes” which preceded a policy of implicit government guarantees for sovereigns. If a government gets in trouble in the debt markets, the ECB will backstop them and buy unlimited amounts of debt (provided the government agrees to oversight and restructuring). The ECB has never had to spend a penny on this program, but just the knowledge that the program exists has had a significant palliative effect on markets.
Meanwhile, the Eurozone economy still stinks, and there’s a real threat of deflation across Europe. Some countries are already experiencing deflation.
That raises the pressure on the ECB to cut rates even further, and possibly engage in some sort of QE-style program.
Meanwhile, the yields on some of these government bonds just look juicy. Compared to British, German, and US debt, the debt of Italy and France is high-yielding, and opportunities like that are not abundant in this economy, especially given the risks in emerging markets these days.
So what was once one of the world’s most hated asset classes — European government debt — is now in the throes of a vicious bull market.