Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
20 Days Left to Find Buying Opportunities In Gold - 25th Mar 19
Will the Historic Imbalance in Gold Stocks to Gold Price Resolve ? - 25th Mar 19
EasySMX Wireless Games Controllers Review - 25th Mar 19
Stock Market Short-term Top - 25th Mar 19
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

ECB Slows Italy Debt Crisis Meltdown, but No End in Sight

Interest-Rates / Global Debt Crisis Nov 16, 2011 - 02:07 AM GMT

By: Dr_Jeff_Lewis

Interest-Rates

Best Financial Markets Analysis ArticleThe European Central Bank admitted earlier today that it had taken part in asset purchases intended to give lift to the Italian debt markets.  Through the week ending November 4, the ECB says it spent $13.1 billion to push down Italian yields against other European governments.


The action wasn’t enough to cool investors’ concerns that the European economy as a whole may be in a stage of complete meltdown.  Today, two-year German government bonds (Bunds) fell to find a yield only seven basis points higher than an all-time low.  Meanwhile, yields on Italian government debt skyrocketed. 

The ten-year Italian bond fell to yield 6.67% to maturity, a clear signal from investors that the Italian bond is quickly growing its risk-profile.  German Bunds with similar maturities traded with yields 4.9% lower, even though both countries operate on the same currency—the Euro.  Clearly, investors believe that the risk for default in Italy is very high, regardless of a Euro-specific plan from the ECB to bail out most of the continent’s failing governments and banking systems.

Ten-Year Bonds

Ten-year government bonds are one of the most important debt issues in finance.  Financiers look to government securities to price everything from corporate debt sales to mortgages, automotive loans, and other financing agreements.  As the 10-year yield rises higher and higher, the size of Italy’s deficit grows as interest charges on debt grow exponentially, while consumers are straddled with higher and higher interest rates for consumer financing agreements.

Rising rates would dramatically affect government balance sheets.  Calculations from the Bank of Italy suggest that a 1% rise in interest yields would remove .2% of economic productivity from GDP.  After a 3% hike in rates, as much as 1% of GDP is immediately removed from the economy, the result of higher interest costs to both government and consumers. 

The risk for default is priced into any financial security, especially debt obligations.   As trading came to an end on Monday, the CDS market reflected larger costs of insurance against sovereign debt exposure.  Even Germany, which has perhaps the most productive economy out of any EU nation, experienced a rising price for insurance on its 5-year Bunds.

Another triple-A rated nation, France, saw one of the biggest leaps in the cost to insure its debt issues.  The private market has long expected France to surrender its triple-A rating following rising deficits, plunging economic output, and renewed concern that indebted nations could swing the whole Eurozone economy into recession.   Credit default swaps sell for 100 basis points more than German CDS derivatives, a clear indication that the country is perceived to be twice as risky as another triple-A rated country.

A loss to France’s triple-A rating will be merely a psychological event.  The markets have already priced insurance on French debt in the same way one might price risk on riskier investment-grade bonds.   To compare the US and France, the United States’ 5-year Treasury sells at a yield to maturity of .86% annually, less than the cost of insurance alone on French debt securities.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules