Alarms Are Sounding in European Bonds

Jean-Claude Trichet, the European Central Bank’s former president, used to argue that one of the euro’s greatest achievements was driving government borrowing costs down to match those of Germany, the region’s benchmark borrower. In recent weeks, however, fissures have emerged that reflect investor concern about the political and economic outlook for at least three of the common currency’s members.
Bond yields for France, Italy and Greece are all spiking higher relative to benchmarks. French 10-year borrowing costs have surpassed 1 percent for the first time in more than a year on fears that its presidential election will result in a victory for National Front leader Marine Le Pen, whose policy ideas are hardly market-friendly. Italy, deeply divided after a referendum on constitutional reform that led to a change in government, has the added problem of a banking industry that defies remedial efforts. And Greece is back in the news for all the wrong reasons as its creditors wrangle over the latest bailout review.
During Trichet’s tenure at the ECB between November 2003 and November 2011, the average value for the spread between French and German 10-year yields was about 20 basis points. The gap has been widening for several months; this week, it reached a three-year high of 61 basis points.
Italian yields spent the first half of last year below those of Spain. After crossing at the end of June, Italy’s 10-year borrowing cost has marched steadily higher compared with its peer. This week, the gap climbed to its widest level in four years at 70 basis points.
It’s Greece, though, that remains the sickest man in the euro. Greece’s two-year yield has soared by more than 2 full percentage points in the past week, climbing above 9 percent to its highest level since the middle of last year. The gap between 10-year Greek and German yields has also climbed, reaching its widest in 12 weeks.

This post was published at bloomberg