The flight into dodgy sovereign debt

German bond yields are down to all-time lows as market turmoil causes investors to pile into sovereign debt, no matter how overpriced.

German bond yields are down to all-time lows as market turmoil causes investors to pile into sovereign debt, no matter how overpriced. The yield on the benchmark ten-year bond touched 0.219% on Monday, with investors apparently unperturbed by the negative yield. Bond yields move inversely to prices, so when yields fall even below zero that still implies a capital gain for bond holders.

Bond bullishness was not limited to Europe's most rock-solid country. Investors have even been lapping up Italian debt, notes Nikou Asgari in the Financial Times. Rome issued €4.6bn of bonds last week, with "demand for the five-year bond" at its highest level since August last year. Ten-year Italian yields hit a two month-low of 2.48% this week.

Yet Rome's borrowings have reached an eye-watering €2.4trn, or 132% of GDP. Far-right League leader Matteo Salvini recently announced plans to spend a further €30bn on a flat tax, a clear provocation at a time when the European Commission has already warned Rome about its profligacy. "Italy's debt is less sustainable than that of Greece," says Simona Gambarini of Capital Economics. "If growth in Italy deteriorates, concerns about its debt sustainability are likely to intensify." That means that, extraordinarily, "it may now be more risky to hold Italian bonds than Greek ones", writes John Ainger on Bloomberg.

Recommended

Will the euro crisis flare up again?
EU Economy

Will the euro crisis flare up again?

With Italy’s borrowing costs rising quickly, and inflation climbing, the European Central Bank has unveiled a new tool to help indebted states. Is it …
28 Jul 2022
The wolf returns to the eurozone’s door
EU Economy

The wolf returns to the eurozone’s door

The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
28 Jul 2022
The bear market in bonds isn’t all bad news
Government bonds

The bear market in bonds isn’t all bad news

The rise in bond yields and the fall in bond prices can be a good thing or bad thing. Bad for bondholders, but good for many risk-averse pensioners an…
21 Jul 2022
Governments will sink in a world drowning in debt
Global Economy

Governments will sink in a world drowning in debt

Rising interest rates and soaring inflation will leave many governments with unsustainable debts. Get set for a wave of sovereign defaults, says Jonat…
23 Jun 2022

Most Popular

Are UK house prices finally heading for a crash?
House prices

Are UK house prices finally heading for a crash?

The latest house price figures show a fall of 0.1% in July. With interest rates rising, inflation hitting double figures and a recession on the cards,…
5 Aug 2022
Brace yourself for the return of rationing
Economy

Brace yourself for the return of rationing

Russia is turning off the cheap energy. That is already leading to belt-tightening, says Matthew Lynn. Who will suffer most, and which sectors will th…
5 Aug 2022
Zhao Weiguo: China’s No. 1 chip tycoon vanishes
People

Zhao Weiguo: China’s No. 1 chip tycoon vanishes

Zhao Weiguo rode a decades-long boom in China pursuing Beijing’s core industrial policy of semiconductor self-sufficiency. Then he fell foul of Xi Jin…
5 Aug 2022