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Low Bond Yields in Europe Could Signal Deflation

Low bond yields, often considered a sign of strength, could be a harbinger of deflation
Low Bond Yields in Europe Could Signal Deflation
Illustration by 731

News flash: Spain is now able to borrow almost as cheaply as the U.S. Yes, Spain, a nation with 26 percent unemployment, red ink in the national budget, and an economy that has shrunk in 17 of the last 23 quarters, has five-year government bond yields of just over 1.7 percent. Italy’s borrowing cost is only un po’ più elevato. Even Portugal has a government bond yield merely a percentage point higher than that of the U.S.

Now for the asterisk, because things are never simple in Europe. It’s unquestionably good that the peripheral nations of Europe have stepped back from the brink of default, emboldening investors to accept lower yields on their government bonds. The problem is that the very austerity measures that lessened the risk of default may have contributed to a new danger in Europe: deflation. To use a metaphor from Greece, whose government borrowing costs have also plunged, Europe managed to steer clear of the rocks of Scylla only to head for the whirlpool of Charybdis.