Europe's Bond Yields Aren't Making Sense

Record low European bond yields should trigger a questioning tickle of the hairs on the back of your neck.
Are they high enough?

Headlines saying "Yields for such-and-such a country fall to record lows" have become commonplace this year. When the borrowing costs cited have centuries of history available, and the countries in question were bond-market lepers just a few years ago, it's hard not to feel a questioning tickle from the hairs at the back of your neck.

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Jim Reid and his fellow strategists at Deutsche Bank AG have been dusting off their history books in an effort to make sense of the dive in European bond yields, saying no-one should be "in any doubt how extraordinary this period is in economic history."

French 10-year yields dropped as low as 1.654 percent last week; Reid says that beats anything in French borrowing history, for which Deutsche Bank has data going back to 1746:


Spanish borrowing costs, which have dropped to about 2.6 percent today from about 2.85 percent a week ago and 3 percent at the start of May, are better than anything all the way back to 1789, according to Reid:


Investors typically gauge a plethora of variables when deciding how much to charge a government for money. Ability to pay, the economic backdrop including the outlook for growth and inflation, relative value based on what's available elsewhere in bond land, supply and demand dynamics, all have to be assessed. In the current post-crisis environment, though, arguably the only investment consideration is "what will the central bank do next?"

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.

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    Mark Gilbert at

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