The Great Insanity In Context (200 Years Of European Bonds)

Tyler Durden's picture

We have had The Great Depression, The Great Moderation, and The Great Recession... but now, thanks to central banks around the world, we have The Great Insanity. Nowhere is the disconnect between market rates and fundamental realities more evident than in European peripheral bond yields. While it is easy to look at the last decade and wonder how it is possible that such heavily indebted (and increasingly indebted) nations could have seen bond yields collapse... but as Deutsche Bank's Jim Reid explains, a glance at France, Italy, and Spain bond yields over the last 200 years shows that this really is a unique time in history (and not in a good way).

 

 

As Deutsche's Jim Reid notes,

Draghi has certainly made a huge impact on financial markets as Friday saw some landmark levels hit across different assets.

 

Many European bond markets hit yield lows with quite a few hitting fresh multi-century all time lows and many others flirting close to them. 10 year French yields hit 1.654 intra-day which was the all-time low covering our entire data history back to 1746. 10 year Spanish yields also hit all time lows with our data going back to 1789. Italy has only been lower in yield for a few months in early 1945 (data back to 1808).

As we alluded to over the weekend, Bloomberg's Mark Gilbert notes,

European yields tell us bondholders have faith that European Central Bank President Mario Draghi will make good on his promise to do "whatever it takes" to defend the single-currency project. They arguably tell us nothing else.

 

Cheap money is a boon to European countries with debt burdens to refinance; Spain has another 102 billion euros of bonds maturing this year with 132 billion euros coming due next year, while Italy's payment schedule is 217 billion euros this year and 248 billion euros in 2015 (at 2.72 percent, Italian bonds now yield half what they did two years ago). The unintended consequence of Draghi's pledge, however, is to eliminate any Darwinistic pressure that investors might exert on euro-region governments to go on reforming their economies.

Be careful what you wish for...