European Bond Markets Finally Start to Show Worry at Greek Debt Crisis

05/05/2015 5:45 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Greek bond prices plunged today and yields soared, and MoneyShow's Jim Jubak points out that the big danger in today's bond market numbers is that it could negate the effects of the European Central Bank's program of asset purchases.

Today, European bond markets have decided to take the Greek debt crisis seriously.

After weeks of shrugging off the possibility of a Greek default on its debt or the country's exit from the euro, bond yields are climbing from Spain to Germany.

The prior take had been that the worst that could happen in Greece was a problem only for Greece and would not have any effect on the most heavily indebted members of the EuroZone. Bond prices had actually rallied and yields had dropped for bonds from Portugal, Ireland, Italy, and Spain, the countries with the biggest debt loads (as a percentage of GDP) and the most troubled economies.

Today, however, bond markets have decided that the crisis, and the possibility that it won't be negotiated away, matters.

Of course, Greek bond prices have plunged today and yields have soared. The yield on the Greek 2-year note climbed 151 basis points today (100 basis points equal one percentage point) to 21%. The yield on the 10-year bond climbed 56 basis points to 11.11%.

But yields for Spanish and Italian bonds that hadn't been deeply affected by the crisis in Greece have also climbed today. The Spanish 10-year bond rose 28 basis points to a yield of 1.77% today. The yield on that bond is still down 123 basis points over the last year, but in intraday trading the yield hit 1.81%, the highest level since December 17, 2014. The yield on the Italian 10-year bond rose by 27 basis points to 1.80%.

The biggest surprise for the day, however, is the increase in yield on the German 10-year bond. Granted the increase was just 6 basis points to 0.51%, but the increase in yield today marks a sixth straight day of higher yields.

Earlier in the crisis, the price of German bonds climbed and yields fell whenever worry about Greece rose. The assumption was that German bonds were the safe haven in this crisis. The higher yields over the last week, however, seem to indicate that the bond markets have decided that even this safe haven isn't safe enough to justify yields so much lower than the 2.18% paid by 10-year US Treasuries.

The worry is justified by the news today. Germany's finance minister Wolfgang Schaeuble threw cold water on the possibility of a deal at the May 11 meeting of EuroZone finance ministers. Greece opened a new front in the negotiations by saying that EuroZone governments and the International Monetary Fund don't agree on requirements for a deal so Greece can't possibly negotiate since it doesn't know what the other side wants. And the IMF is, actually, raising doubts about its willingness to pony up a big share of the proposed 7.2 billion euros in an extended bailout program unless Greece's EuroZone creditors write-off part of that country's debt.

The big danger in today's bond market numbers is that it could negate the effects of the European Central Bank's program of asset purchases. The goal there was to reduce interest rates and weaken the euro in order to ward off the possibility that the EuroZone would move from very low inflation to deflation and to increase very tepid economic growth. Today, the European Commission released projections for inflation and growth that show some progress but also indicate how much still needs to be achieved. The commission raised its inflation forecast to 0.1% for 2015, certainly an improvement from the commission's earlier projection of deflation in 2015, but still way below the 2% target set by the European Central Bank. Growth in the EuroZone as a whole will be 1.5% in 2015, up from the earlier projection of 1.3%. But the commission also lowered its forecasts for growth in France, Italy, and, of course, Greece, for 2015.

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