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Macroeconomics

12 March 2014

Bond Prices Say Crisis is Over 

Bond traders are telling the financial markets that Europe’s sovereign debt crisis is history.

Bond yields have plunged in three of the nations hit hardest by the eurozone debt crisis. In the first week of March, yields on Spanish 10-year sovereign bonds fell to their lowest since 2006; Irish 10-year yields hit their lowest since 2005; and Greek 10-year yields sank to a level last seen in April 2010.

The European Central Bank’s forecast of slow but steady economic growth in the coming months seems to have bolstered traders’ outlook on the eurozone’s peripheral countries.

The average yield to maturity for the bonds of Spain, Ireland, Greece, Italy and Portugal has fallen below 2.5% – down from more than 9.5% in 2011, when markets feared that the sovereign debt crisis would scuttle the eurozone’s monetary union.

The bonds of these countries still trade at a premium to those issued by Germany, but the gap is narrowing. Last week, Italy’s bonds traded about 1.75 percentage points higher than German bunds, and the gap for Spanish bonds was about 1.7 percent, the narrowest in the past four years.

One notable sign of the growing confidence: When Russia’s intervention in Crimea triggered a sell-off in emerging markets securities, traders did not dump the bonds of peripheral eurozone nations.

Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London, says the underlying economics of the eurozone have improved significantly. The reform efforts of countries like Spain have helped stabilize their economies, and investors have taken notice.