Bond yields of Portugal, Italy,Ireland and Spain have come off sharply from levels seen in January 2014. Portuguese ten year bonds yields are down to levels of 2.11% as of February 2015 from levels of 3.58% seen in January 2014, a fall of 147bps. Italian ten year bond yields are at levels of 1.50% down 167bps from levels of 3.17%. Irish ten year bond yields are down 220bps from levels of 3.30% to 1.10%. Spanish ten year bond yields are down 160bps from 3% to 1.4%. Bond yields are trading at or close to record lows for all these countries despite issues of high debt, lack of growth and lack of inflation in the Eurozone. Government debt as % of GDP is at 92% while inflation is at negative 0.6% and GDP growth at 0.3%.
Bond yields of these countries are below US ten year treasury yields of 2.06%. Portuguese ten year yields went below US ten year yields briefly on the 23rd of February and could well move below and stay below in the coming weeks.
The sharp fall in bond yields of indebted Eurozone nations is largely due to the anticipation of ECB QE, where the central bank will start buying Euro 60 billion of bonds a month starting March 2015. ECB policy rate is at record low of 0.05% and discount rate is at -0.20%. Cheap liquidity is spurring trades to earn spreads on whatever asset is available in the market.
Bond yields have rallied despite the Greece bailout issue with the country securing an extension of four months for its bailout. The Greece bailout chapter is not yet closed and will rear its head once again. Greek ten year bond yields are at levels of 8.90% up 190 bps since last year indicating that markets are worried about Greece default. Read our note on Greece Bailout.
The markets are searching for yields to park liquidity and that is driving the markets to bonds of Eurozone countries.
Indian bonds are attractive for cheap Eurozone liquidity funded trades. Indian ten year bond yield is at levels of 7.70%, almost 570bps to 660bps over Eurozone indebted nations bond yields. FIIs have exhausted their limits of USD 30 billion on government bonds and with the Union Budget for 2015-16 likely to increase limits, money will pour into INR bonds starting March. Indian bond yields and the INR will benefit from the increased flows.
