We have been highlighting the upward move in Greece's bond yields for some time (together with the upward move in Ireland and Portugal’s bond yields). At the end of last week, the Greek 2-year bond yield was recorded at 30.5% and some people suggested that it represented a good buying opportunity? However, early this week the yield jumped dramatically to 42.5%.
More worrying is the fact that Italy’s 2-year bond yield has also risen sharply to 4.7% from around 3% at the start of the month. (Italy’s government debt is equivalent to three times the combined debt of Greece, Portugal and Ireland). Uncertainty around the management of the sovereign debt crisis in the Euro area is as acute as ever, with little evidence that a more substantial resolution is imminent.
In contrast, Germany’s 2-year bond yield has fallen even further and was last trading at a mere 1.2%, which is below the ECB’s current reference interest rate of 1.5%, highlighting the extreme risk aversion within the Euro-area. At recently as 2008 the Greece and German 2-year bonds traded at very similar yields.
It is fascinating to see just how much the Euro-area has diverged economically and politically in less than 3 years. It is also hard to see how the Euro-area converges again, which is obviously necessary for the long-term success of the monetary union.
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