Tuesday, July 24, 2012

Major Warning Sign for Spain's Economy

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.

4 comments:

  1. Sounds like US 2015

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  2. Bailout alert. Don't worry, central banks never run out of money.

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  3. I 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.

    But that's just me...still can't figure out why you would buy a t bill at 1%.

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  4. 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.

    (1.0717 ^ 10 ~= 2)

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