Portugal Yield Curve, Meet Kansas

Tyler Durden's picture

And so, Portugal flatlines, and in fact is inverted in the outer years. The bond market is waving goodbye to Portuguese paper which is now effectively trading on the Pink Sheets.

Same thing for Ireland:

And below are the three horsemen of the Eurocalypse. Ironically the bond market is offering a far higher yield for ultra short-term Portuguese than Irish.

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Mercury's picture

Ireland/Portugal/Greece....whatever, it's all the same now...what's holding yields down ~10% ?

FOC 1183's picture

portugal 5yr cds breaking out to new highs

ml8ml8's picture

What's holding yields to 10%?  Hope.  The ECB (with the backing of Germany, big ass-umption) has the capacity to bail Greece, Ireland, and Portugal.  That buys time.  Spain?  Neither Germany nor France have the capacity or political will to bailout Spain.  The IMF (read:  U.S.) theoretically has the capacity to bail Spain.  So, could this thing get strung out until 2012?  Sure.  So, hope persists that, while time is purchased by the ECB (IMHO likely to occur) and the IMF (remains to be seen), the PIIGs and Spain can somehow cure their underlying economic and debt woes.  Strong odds are, the whole thing fails.  If the Euro-zone can pull it off, it will be the greatest comeback since [insert great sports analogy here.] And, oh yeah, while time is being purchased, Euro banks get to collect a 10% yield on Irish and Port bonds.

The kink in the works is Ireland.  If Ireland forces haircuts on the European banks and other financial institutions holding bonds in Irish banks, then the ECB will be required to support those Euro banks balance sheets because of the writedowns involved.  I haven't crunched the numbers, but I think the market believes the ECB may lack the capacity to bail the PIIGs AND dozens of ECB banks simultaneously.  But if you're Ireland, why should you take that shit onto your country's balance sheet?  Ireland is going to say fook it--fook the fooking ECB.  And from the ECB's financial point of view that stretches everything even tighter, plus it's creates a precedent for the good citizens of Greece and Portugal to see and urge their leaders to follow--a political disaster.  It's possible (albeit unlikely) that the IMF could step in and help the ECB deal with Ireland.  That would create a precedent for dealing with Spain when it finally blows up (IMHO a very dangerous precedent).

It doesn't really matter if Trichet raises rates.  A .25% raise is spitting int the wind.  In the short term, a rate raise supports the Euro and attracts capital, but in the long (and probably medium) term it hurts Euro-zone economies.  I think Trichet sees the Euro as a Deutsche Mark wrapped in a Euro blanket.  The periphery countries have far deeper structural problems.

Harlequin001's picture

China has the capacity to bail them all out, they just need to wait for yields to max and step in...

tekhneek's picture

What application are you using to chart this? (noob here)

bob_dabolina's picture

bloomberg terminal.

If you have to ask you can't afford it


Bleeping Fed's picture

I've heard ~$1500/month.  I'd love to have one if I had that kind of money.

malikai's picture

Sell a kidney. That should get you a couple years worth of a bloomberg terminal.

Harlequin001's picture

what for, it's a waste of money. The markets are all fixed.

If you don't sit on the board of a primary dealer there's no way you can know what they are going to do at board level.

You lose, in addition to your $1500 cost...

might as well just buy gold. No risk there then and $1500 is a lot of storage fees...

Joeman34's picture

More, $6,000/qtr...

And that's for basic data download capacity.  The more data you want to download, the more you pay...

Harlequin001's picture

what for, it's a waste of money. The markets are all fixed.

If you don't sit on the board of a primary dealer there's no way you can know what they are going to do at board level.

You lose, in addition to your $1500 cost...

might as well just buy gold. No risk there then and $1500 is a lot of storage fees...

UGrev's picture

A special piece of hardware to pull data and chart? Are you shitting me? I just had a flash back to mainframe dumb terms. 

redpill's picture

Did you think Bloomberg is successful because of its news channel?  This sucker is a cash cow.

UGrev's picture

I'm.. I'm.. sort of laughing.. Is there a way to gain access to the market data for free? and if it's not free, why isn't it free? Isn't this supposed to be a free market? 

bob_dabolina's picture

Free market?


You've watched too many Obama speeches. There is no free market.

UGrev's picture

heh. tongue in cheek. I've never watched one Obama speech in full. Clips, yes; full, no. Can't get past the stuttering. 

malikai's picture

If you're outside of the states, you can get a demo spread betting account with one of the big players. Some of them provide relatively accurate market data on indices, fx, commodities, and equities.

UGrev's picture

It just seems like a whole lot of data control where it should be freely accessible. 

malikai's picture

Keep in mind realtime level2 data is almost never free. Practically all of the exchanges charge per endpoint for that data, and bloomberg is charged for each endpoint plus they pay redistribution fees to practically all exchanges they provide data for. A bloomberg terminal costs as much as it does because they offer plenty of additional functionality like their messaging system, realtime data and data analytics, and they combine data from many, many markets. It is the definitive tool for professional traders because of this.

Mercury's picture

"Free market" doesn't mean you get shit for free.

You can argue that market data shouldn't be as expensive as it is (B-berg just passes through those costs from the exchanges) but a lot of the data gathering and organizing is done on a proprietary basis by B-berg.  They aren't the only game in town either, it's a pretty competitive business.

UGrev's picture

that was a tongue in cheek comment / connection. Don't read into it any more than that. 

I don't know how it's all wired up, but it just seems odd that the channels that need to be taken in order to "give them money" (for lack of a better term) is "Closed" or prohibitively expensive, thus forcing us to use "banking"/"trading" instutions to do this for us (well, for the non-trader joe). 

What is the mechanism that precludes the average person from trading? Why can't I go right to the source?  It's like the banks. I can't borrow from the places the banks borrow. Instead, I'm forced to pay interest on money that was borrowed from the fed at 0%. Well, at least that's the feeling that get about how this is all wrapped up. 

Cthonic's picture

The exchanges make a huge sum off of the data they promulgate, the lower the latency, the higher the cost.  This is core to the whole HFT farce.  Maybe someday investors will wise up to street games and demand that companies' shares be exclusively listed, traded, and cleared through an exchange with a completely different structure, but don't hold your breath in the meantime.

dark pools of soros's picture

Yahoo! finance got real time quotes and plenty of tools in the comments section

Cthonic's picture

rofl.  they probably think openbook ultra is the name of a new tablet pc.

ILoveTheWorld's picture


That's the greek 10 yr

Bloomberg gives you all the data for free, but if you want a nice graph like the flatline for all the different yields together you'll have to create it yourself copy and paste numbers into excel.

bob_dabolina's picture


Yup. With roughly 250,000 terminals worldwide @ $1,500 a month that's a cool $375 million a month.

redpill's picture

These days it could be replaced with a simple display listing NFLX and AAPL along with a giant red button that says BUY

Hell you wouldn't even need two screens.

dark pools of soros's picture

where would you watch the porn then>??

snowball777's picture

Yup...at some point using the word 'curve' is just disingenuous...this is that point.


Sudden Debt's picture

I wonder how many years it will take before the mainstream media picks up on this...



EscapeKey's picture

You really think you can explain "inverted yield curve" to the average X-factor viewer?

UGrev's picture

You can't.. I don't even have a fucking clue what it means. When I see the word yeild, I see shit like this in my head:

foreach(var item in collection){
     foreach(var child in collection.children()){
        yeild return child;
yield return item;

But judging from the responses, context tells me this flat line is a practical equivalent to death of an economy. 

Sudden Debt's picture


This is easier to follow. Look at the 10yrs on bloomberg.

For portugal it's now at 8,38% on a 10yr. Anything above 4.5% means shitstorm.


Cash_is_Trash's picture

Fund your liabilities now PIIGies

CrazyCooter's picture

I "for each" for a living as well, so I will go out on a limb and observe what I think it is.

A curve is a series of points where each point represents an X/Y value (sorry to be obvious). The Y axis is yield in % terms, just like you pay "yield" on a credit card. In these cases we are looking at 2, 5, or even 10% per annum. The X axis is the maturity term of the debt ranging from 3 months to 30 years (haha).

With the obvious out of the way, less obvious is the fact the curve should, well, curve. Borrowing at 3 months is pretty low risk lending. Defaults are a big deal. So the interest rate on a 3 month bill should be "lowest". 10 years is a different matter entirely, as many, many things can happen in 10 years. So the yield is higher to reflect the risk of the longer time span.

When the curve inverts, that is when a forward point on the curve has higher risk/yield (its fun to exchange these words - they are equal in this sort of context), that means the market thinks bad things are afoot, like a possible default, and are pricing accordingly.

One other thing that I found quite tricky, since we are on the subject, is the price of the bond when you sell it. Consider if you bought a "Volker bond" back in the day at 10% from the US government. Consider you also bought a bond a couple years later at 5%. Which is worth more when you sell it? The volker bond has a lower "price" on the market because more of the the high interest. The bond with 5% has a higher price because it will earn less interest.

It is the opposite of what you might intuit; low yields == high bond prices and high yields == low bond prices.

So a movement where yields shoot up mean those that hold the debts are losing money as new bonds coming onto the market sell for less than the same bonds already in circulation.

This is required to understand by Bill Gross bailed out of his Treasury position; he thinks the price of bonds is going down/rates are going up. At least for a period of time (3 months - 6 months - 1 year - <shrugs>).

I am not a finance/econ/trader, so please correct me if I screwed any of this up!



I am a Man I am Forty's picture

you are correct, bonds go up and down just like stocks do, but the big difference is if you hold to maturity you get all of your money back.  buying treasuries while they were yielding 10% would have been an excellent investment, bill gross bailed because taking into account inflation and the risk of all the government debt, the yield isn't there to justify holding

oogs66's picture

Here is my attempt at a simple explanation.

Lets say a country has 3 bonds.

They have a 3% coupon 3 year bond,  a 4% 5yr, and a 5% 10yr.

Yield    3%    4%   5%

Price    100    100   100


So the above yield curve is 'normal' or upward sloping.  Investors demand higher yields for longer maturities based on inflation expections, higher uncertainty, etc.

Now lets say the countries economy deteriorates a little bit and yields move 1% higher across the board (a parallel shift in the yield curve).  Here is the new yield curve

Yield    4%    5%   6%

Price    97     95.5   92.5

The longer maturity/duration bonds move more in price terms for a given shift in yield.

Now lets assume the situation deteriorates further, say 2% more.  Here is the new yield curve

Yield    6%    7%   8%

Price    92      87.5  80

At some point people start focusing on default risk.  In event of default, each of these bonds only has the same claim amount - par.  So if you think default is high, spending 92 to buy the 3 year bond may seem more risky than spending 80 for the longer dated bond.   If there is a default the 2 bonds will have the same value.  So in normal times, people only focus on yield, and future uncertainty, but in times of credit stress they start looking at the risk of non payment of principal.


Maybe at 8% the default risk isn't too bad, so the market prices it as a 'flat' yield curve.  8% across the board.  The new curve looks like this

Yield    8%    8%   8%

Price    87      84    80

In a curve like this, investors still take more jump to default risk, but less than in a normal curve and it implies still some hope that there is either a positive resolution or they make it through to pay the shorter maturity bonds.  At a price of 80 and yield of 8% that's not unreasonable. 

If it gets worse again and we go to a flat curve of 10% we would have the following

Yield    10%   10%   10%

Price    82      77    69

At these yields, the risk of default is much higher.  Lets assume that you believe 60 will be the value of bonds in event of default/restructuring.  Then clearly the 10 year is starting to have limited downside (9 points) with big upside.  It is also clearly implying a high probability of default.  The 3yr bond at 82 looks horribly unattractive in this light.  Why take the risk of 82 pts down vs 18 up, when you can have 9 pts of downside (if your recovery assumption is correct) and not only 31 points of upside, pick up an extra 2% per annum in coupon.  So the market will adjust and you will get an inverted yield curve.


Yield    12%   11%   10%

Price    78      73.5     69

Now once again, the risk/reward can look more in line. 

So, there is the thought process/rationale, of how the bond market moves from steep curve, to flat curve, to inverted curve and hope that helps explain why an inverted curve really is bad.


chairsatan's picture

Exceptionally good comment.

UGrev's picture

First comment I've saved to a text file :) 

thanks for taking the time to detail the flow. Makes more sense now. 

oogs66's picture

thanks.  there are a couple little errors in the write-up (22 points of downside, not 82), but was done quickly, and the gist of it is correct and am glad it helped clarify as I have this feeling we will be seeing a lot more about inverted curves in the weeks and months that follow.

HedgeYourself's picture

"Inverted" yield curve means that interest rates of shorter maturity term debt are higher than longer maturity debt - expectation would be in normal curve that the yields increase for the longer maturity periods.

For info on yield curves, including more explanation and examples of normal looking and inverted ones see e.g. here: http://en.wikipedia.org/wiki/Yield_curve