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A file photo shows a flag of the German stock market operator Deutsche Boerse at the Frankfurt stock exchange. (THOMAS LOHNES/AFP/Getty Images)
A file photo shows a flag of the German stock market operator Deutsche Boerse at the Frankfurt stock exchange. (THOMAS LOHNES/AFP/Getty Images)

German bonds, not junk yet Add to ...

It’s been a dramatic day on the European bond market, with yields rising almost universally and Spanish debt getting dangerously close to the high water mark.

Spain’s government bonds have been falling in price since the country announced it was taking up to €100-billion to stabilize its banking system. The yield on the 10-year note rose another 18.5 basis points on Tuesday, to 6.651 per cent. Once the rate tops 7 per cent, Spain will find itself in the rare company of Ireland, Portugal and Greece, all of which required full-scale government bailouts.

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Italy’s borrowing costs are rising rapidly too. The yield on the Italian 10-year note rose another 13.7 basis points, to 6.141 per cent, as traders speculate that the country will be next to need a bank rescue.

In this environment, only one country saw its bond yields fall. Germany, you say. Wrong. Portugal yields dipped 3 basis points. In fact, German yields have been rising, leading many to question what’s happening to the haven-status of bunds, which are considered second only to U.S. Treasury notes in terms of safety.

It may be that the markets are getting a bit more cautious about bunds as Germany is perceived to be back stopping the debt of the rest of the euro zone, writes Joe Weisenthal at Business Insider.

It’s possible that markets are starting to see German bonds “as de facto Eurobonds,” he says.

“If Germany is pot-commited [sic] to backstopping the debt of the entire Eurozone then it stands to reason that Germany isn't the perfect risk-free credit that people assume. No matter how fiscally stable it is, Germany doesn't have its own printing press like the U.K., Japan, and the U.S. do.”

Mr. Weisenthal also posts an interesting graph that shows how German bunds and U.S. Treasury note yields started to diverge late last year when worries about Europe spiked.

 

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