S&P lowered Belgium’s sovereign debt rating on Friday. Yields on 10-year bonds are approaching 6%. Belgium will soon be infecting the ECB’s balance sheet — the ECB will have to begin buying Belgian bonds in order to suppress the interest rate.
Arguably the biggest economic news last week was the failed German bund auction. This was the weakest auction since the inception of the euro. Mind you, the interest rate on offer was an historically low 1.98% for 10-year bunds. So perhaps investors were balking at an unattractive interest rate from a German Treasury that overplayed its hand. A failed bond auction associated with the lowest interest rate ever offered is entirely different from a failed bond auction with the highest interest rates offered. Plus, investors are scooping up short term German sovereign bonds with such demand the yield has been driven negative. That means investors are willing to accept a guaranteed loss on their money to have it in short term bunds.
Fitch bond ratings agency lowered Portugal’s sovereign debt rating to junk. This was no surprise. Portugal has been dragging their feet with implementing the agreed reforms (in return for the 100B+ euro bailout). Like all of southern Europe, Portugal needs to drastically lower wages in order to become competitive. Doing do will cause a depression. Implied interest rates based on the trading of 10-year Portuguese bonds rose to 12% levels. Good thing they’re not reliant on raising cash from the bond market and have a bailout fund to rely on.
Friday saw a weak 2-year Tnote auction that drove the yield on the 2-year note up to 8% — another euro-era high . Tuesday saw record high yields on the 3-year and 10-year notes due to weak auction demand. With the 10-year yielding 7.5%+, Italy is now firmly in the bailout zone (other PIIGS countries were strong-armed into accepting a bailout when their interest rate on the 10-year got this high). And again I point out this is with the support of the ECB buying bonds in the background to help keep a lid on it. Absent the ECB, this game would have been over long ago. This situation will not last. Something has to give.