What's all the ruckus with high bond yields in Spain? And does that have anything to do with the less-than-stellar numbers the stock market posted on Friday?
In truth, Spain is making financial choices more difficult for everyone as of late. Worldwide media has got its panties in a bunch over high interest rates on the Iberian Peninsula: first Portugal, now Spain. High interest rates mean the same thing for nations as it does people: it's the cost of the money you want when you have bad credit. The lender is obviously willing to take a HUGE risk so they are rewarded (and you are penalized) with high interest. In the movies, it's this convenient borrowing cost that's obnoxiously high enough to prevent full re-payment, prompting mobsters to dismantle your kneecaps.
Well, the rain is pouring down in Spain and that ship has sailed. The security to watch is the benchmark 10-year bond. Most advanced economies offer this particular bond and many others that mature sooner or later than 10 years. In theory, "good" governments should allow for productive economies where people have jobs and earn income, spend and save; wash and repeat. Even better if they can choose where they work and what they buy. Under the productive economy assumption, even if governments run national deficits, it can borrow, issue bonds and ramp up production to pay the money back. In theory. In Spain's case, they spent way more than the Spaniards could produce so the deficits got bigger and bigger. The result is a mountain of debt, lots of excess capacity, high interest payments, and very very strict measures to get the economy back on track. Greece and Portugal are experiencing this now! And the citizens are none too happy about it because that involves pay freezes, layoffs and benefit reductions. Dessert or disaster after your rounds of spending? Disaster you say? Done.
Government debt is seen as a "safe" alternative to, say, stocks because again, economies should be stable and dependable, so returns are less risky. U.S. Treasuries are a famous "safe haven" for your money. Sure, our credit is crap, but we're the largest, most productive economy on the planet so you know...we're good for it. Whereas Spanish bond yields on 10-year debt is higher than 6%, U.S. 10-years are just around 2%. Night and day. Rain and sunshine.
The movement of bond yields (returns) reflects investor sentiment: literally, how investors feel. Investors wear their hearts on their sleeves. They take risks, but they don't really want to lose money. Fact is, it's inevitable. But no one wants to lose, so when Spanish debt becomes a liability, investors run in the other direction and expect the worse. Recession in the Euro Zone and the U.S. have left investors with weak stomachs. Thus, Spain's recent tumble into fiscal turmoil inspired investors worldwide to fly the straight and narrow and reallocate into the safe arms of U.S. government debt.
The adverse consequence is that money not only left Spain, but also U.S. stock markets, also seen as riskier investments than government bonds. More than likely, your retirement account or other investments probably took a dive just before the weekend. Personally, my portfolio - which is disproportionately weighted in stocks for growth..I think.. - took a 1% hit that I'm not too pleased about. It's given that our world is a wide web of connections, so not only do we share the resources, but we also have to share the risks and the consequences of of economic decision-making. As the United States debates federal spending, debt ceilings and new leadership, voters are wise to become informed and self-aware! Have you noticed any negative changes in your stock portfolio as of late?
prosperity,
@RogueEconomista aka dls
