On Wednesday, the European Central Bank (ECB) will announce how much banks have taken out in low-cost loans. CNBC would lead you to believe that this announcement will, “..likely set the tone for markets.” We would argue that the tone has already been set, and its one that involves a sense of calm. Where are we gathering that sentiment? From some key bond markets in Europe that we follow.
During the Fall correction of 2011, our markets were reacted pretty severely to the moves in Europe’s bond markets. In some cases, 10 year bonds in some of Europe’s key nations were rising 50-100% over the course of a few weeks. The reason such moves are so rippling across global markets is because it causes the borrowing rates of those countries to skyrocket. In many European countries, entitlements make up a big portion of their economy (see Greece as exhibit A), and when borrowing costs rise, it becomes harder to fund the entitlements they have guaranteed to their citizens.
Not until Europe’s bond markets calmed down, and returned to more “normal” daily movements did we see our markets start to form a stable bottom. Now, here we are a few months later and finance outlets like CNBC are still focusing on Europe. In reality, Europe hasn’t been affecting our market for quite some time, and why should it? Those same 10 year bonds that were turbulent during the Fall, are now flying with the seat belt sign turned off. Let’s take a look:
- Italy’s 10 year bond currently yields 5.35%, its lowest since early September
- Spain’s 10 year bond currently yields 5.03%, near its lowest since August
- Belgium’s 10 year bond currently yields 3.62%, near its lowest in over a year
- France’s 10 year bond currently yields 2.93%, its lowest since October**
**France’s 10 year bond is the one of the four that hasn’t given up all of its gains from its Fall ascent, this is something to keep an eye on moving forward
So while the endless headlines out of Europe might make for good press to CNBC, the bottom line is the bond markets in Europe aren’t jiving with their rhetoric. Keep your eye on those bond markets though as a move higher in one of the yields could be an early warning sign that Europe will come back into the forefront. For now, the action in the VIX and oil is more likely to dictate the markets short term movements.
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