In the last few weeks the market has been watching Italian yields as much as the VIX for a measure of sentiment. In the current environment, movements in 10 year government bond yields help to differentiate between those countries investors see as safe havens and those viewed as riskier investments. The charts above help to show which countries fit into each category.
This can result from investors demanding higher returns to hold the debt or selling to reduce positions, for example due to lower growth forecasts or ineffective austerity measures. Amongst the non-PIIGS, there has been a sharp move higher in Turkish, Hungarian, Belgian, Czech, French and Austrian yields. Greece continues to provide worries, while Spanish yields are quickly catching up to the Italian levels which caused the downfall of Mr Berlusconi.
Downward move –Bad news for pension schemes:
Countries seen as relative safe havens have seen their yields fall as investors place the return OF capital above the return ON capital. This helps those governments by providing cheaper financing rates but provides a headache for pension schemes who have seen their liabilities increase. Norway, UK, Denmark, Germany, Sweden and Switzerland continue to see yields move lower. Portugese yields are lower than a month ago but still above 10%. However, Ireland is showing signs of stabilising.
As we can see, there are few safe havens left in Europe. Even those previously viewed as relatively safe, like France and Austria, are seeing their yields rise. It should be unsurprising that the Bank of England showed concern and uncertainty about the future path of inflation and growth in this week’s Inflation Report – the Euro-area macroeconomic outlook will continue to deteriorate until policymakers are able to agree on a viable way to lower yields to an affordable level for troubled countries.
Where will that solution come from? Most likely is an increase in quantitative easing not only in Europe but also here in the UK as well as the US. The longer it takes European and G20 policymakers to agree on an ECB/EFSF/IMF led resolution, the greater the chance the Bank Of England and Federal Reserve will have to purchase assets to prop up their own economies.