It is bad enough when any economy sees its yield curve turn negative, i.e. its short-term rates become higher than its long-term rates, but it is really bad if that economy is already in the middle of a financial crisis with all rates moving higher.
Spanish bonds have almost turned negative. The debt is now trading above 7% all the way DOWN to the 3 YEAR MATURITY. This is very serious. It means even short-term financing will be very expensive for the Spanish government.
Sounds like US 2015
ReplyDeleteBailout alert. Don't worry, central banks never run out of money.
ReplyDeleteI don't quite get why 7% interest means the end of days. Wasn't the T bill at 7% in the early 90's? Isn't this how the market (yes I know its not entirely free) is supposed to work? Risk increase generally gives you higher return.
ReplyDeleteBut that's just me...still can't figure out why you would buy a t bill at 1%.
7% is the magic number because it results in interest over ten years equal to the principal. So it's really just a feel-good (feel-bad?) idea that if a country has an X shortfall now, it's not going to have 2X in ten years to pay it back.
ReplyDelete(1.0717 ^ 10 ~= 2)