As has become typical over the last few months, the trend in the sovereign debt markets has been affected by the outcome of events in the euro area and by the effect of central bank announcements on investor expectations. In the case of peripheral Europe, the most notable aspect has been the sovereign risk premia of Spain and Italy continuing to get back to normal.
For Spain, the possibility of being able to rely on the European Central Bank acting in the secondary markets if things get ugly (with a prior request for a preventative line of financing from the ESM and compliance of strict fiscal conditionality) has been enough to push down the yield on Spanish Treasury bonds. Specifically, the yield on the 10-year bond fell to 5.35%, its lowest level since April. This circumstance, as well as the financial, fiscal and structural reforms promoted by the government and improved access to foreign capital markets, have led the main rating agencies to keep Spain’s debt rating at investment grade (Standard and Poor’s lowered the rating but left it above «junk» and Moody’s refused to lower it to this dangerous level). The Treasury has taken advantage of this situation to carry out further emissions of bonds at a lower cost than on previous occasions and with a high degree of acceptance among international investors.
The most important news in this respect is that, through the different Treasury issuances, 94% of the government’s expected financing requirements have already been met for 2012. However, there are several reasons why this fall in interest rates on Spanish debt might not be definitive. Particularly the unknown factors regarding budget spending, the deterioration still being seen in Spain’s economic figures and also the reticence shown by Germany and other countries to the ESM injecting capital directly into financial institutions as a backdated measure (i.e. for cases arising before the common supervisor was set up).
Meanwhile, the debt of countries with the best credit rating, Germany and United States, has accumulated a slight upswing in yield, although always within exceptionally low levels and within a context of limited volatility. In the case of German sovereign debt, as the risks of a break-up in monetary union and the debt restructuring the peripheral countries have started to diminish, the price of long-term German bonds has lost positions.
This has helped to narrow the spread between Spanish and German bonds. From now on, the key factors appear to be: the search for solutions so that Greece can remain in the euro, how the Spanish economy and its public debt develop and how negotiations proceed to re-establish monetary union (adding banking, fiscal and political components). If common sense rules in the questions to be cleared up in the political arena, the outcome will be a consolidation of the trend towards a lower peripheral sovereign risk premium and a slight upward propensity in internal yields on German debt.
The yield on US debt has also risen modestly. The Fed’s commitment and guarantee that its actions will always be focused on promoting economic growth within an environment of price stability has improved expectations for the economic performance of the United States in the long term. This improvement has brought about an upswing in yield to levels close to 1.80% but it is unlikely to rise much further, precisely because of the Fed’s acquisitions in the bond markets.
In any case, the market trend for US debt could alter if the country’s authorities do not manage to handle the «fiscal cliff» effectively before January 2013.