For the last few days, we’ve been spotlighting the dramatic fall in Spanish and Italian shorter-term yields.
In particular, we’ve been highlighting the drop in yields on two-year bonds, which mature before the expiration of important liquidity measures (3-year LTROs) initiated by the European Central Bank earlier this year.
Today, that dramatic decline in yields has stopped, and indeed reversed somewhat. Yields on Spanish two-year bonds are 12 basis points higher, generally a pretty significant move for bonds. Yields on Italian two-year bonds are 4 basis points higher. At the same time, yields on 10-year bonds for both countries have fallen slightly today.
Admittedly, a one-day movement in bond yields is no be-all and end-all indicator. That said, today’s moves suggest a couple things:
Investor belief in ECB President Mario Draghi’s commitment to pushing down the short end of the yield curve for sovereign bonds only goes so far. Lawrence MacDonald, a bond trader and the author of “A Colossal Failure of Common Sense” told Business Insider last week that he plans to “sell rallies if the Spanish yield curve starts to flatten again.” Another investor remarked casually that he wouldn’t touch these bonds anywhere near yields this low.
It also could signify that investors are finding that they overestimated the scale of the ECB’s projected action—many developments Draghi spoke about are contingent on EU leaders fulfillment of the central bank’s demands. EU leaders are not exactly known for their ability to meet expectations.
In a broader perspective, the steep fall in Spanish and Italian shorter-term borrowing costs recently appears to be just another temporary reprieve from the crisis, in a cycle of market ups and downs reflecting investor fear that the euro currency will fall apart.