With once-reliable nations like Spain and Italy now looking like decidedly dodgy prospects , the prices bonds in so-called ‘haven’ countries like Germany, the US and (who’d have thought?) the UK have risen, with yields (which reflect how risky investors think the bonds are – the higher the yield, the more precarious the investment) plummeting. In fact, yields on US 10-year notes dropped below 2% for the first time since the 1950s yesterday. And yes, the US might be relatively stable – but bear in mind that it’s been barely a fortnight since its debt was downgraded by credit ratings agency Standard & Poor’s.
It would be understating things, then, to say that all the political pussy-footing around over sovereign debt in the Eurozone (and the US) has hit stock markets badly. After yesterday’s decision by Morgan Stanley to downgrade its global growth forecasts for this year and 2012, not to mention some pretty devastating news about business activity in the US, markets went into freefall. Asian markets were worst-hit, falling by 3.2% (at one point, Seoul had to suspend trading after the Kospi dropped by 6.2%). Elsewhere, the FTSE 100 fell 2.5% this morning, while the price of US futures indicate that the S&P 500 will only recover 1.6% of its 4.5% slump yesterday. Yikes.
The worry now is that although German Bunds are selling like hot cakes because investors assume they’re nice and stable, their yield might begin to rise. After all, if Spain and Italy do end up requiring bail-outs (which is looking worryingly likely), Germany may well end up inheriting debt worth a not inconsiderable €520bn. That will take its debt-to-GDP ratio from 82% of GDP to more than 100%. So either investors are being a bit short-sighted – or they’re very risk averse.