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Across the European continent debt yields on existing debt are rising and indicate a growing level of fear about their nagging debt crisis.\u00a0 Specifically, last week yields rose in Portugal, Italy,\u00a0 Ireland, Greece and Spain – alias, the P.I.I.G.S. nations.\u00a0 But even the bonds yields of Europe’s strongest economy, Germany, rose this past week.<\/span><\/p>\n Why are rising yields evidence of fear?\u00a0 Let’s start with the price of a bond because it makes the case more obvious.<\/span><\/p>\n If the perceived risk of default on existing debt obligations rises in a country, say Greece, what is the natural outcome for investors?\u00a0 That they demand less of those bonds.<\/span><\/p>\n What happens when the supply is fixed and demand falls?\u00a0 That’s right, prices fall.\u00a0 This is true for any good or service, not just debt.<\/span><\/p>\n Yet, the interest payment on these existing bonds is contractually fixed.\u00a0 So when the price of the bond falls, and the interest payment remains the same, then the yield on the debt rises.<\/span><\/p>\n A numerical example will help illustrate this point.\u00a0 Here I am going to imagine the following:<\/span><\/p>\n So the yield on the bond at issue is \u20ac30 \u00f7 \u20ac1.000 = 3.00%.\u00a0 Does that make sense?<\/span><\/p>\n Now what happens if people get a bit nervous about Italy’s ability to pay its debts and they demand Italian debt less?\u00a0 The price bid by a prospective buyer is going to drop.\u00a0 Imagine that investors in Italian debt are only willing to bid \u20ac950 now because of their solvency concerns.\u00a0 What happens to the yield on the 10-year bond now?<\/span><\/p>\n So the yield on the bond after the debt fear increases: \u20ac30 \u00f7 \u20ac950 = 3.16%\u00a0 That’s a rise in yield of: 3.16% (current yield) – 3.00% (yield at issue) = 0.16%<\/strong> or 16 basis points in the parlance.\u00a0 Thus, rising yields are an indication of an increase in nervousness.<\/span><\/p>\n In Europe yields on government debt are reaching all time highs since the introduction of the euro.\u00a0 This is another way of saying that the current debt crisis has investors in Europe their most nervous ever.<\/span><\/p>\n That is important and noteworthy, especially since the root causes of the crisis have not gone away.<\/span><\/p>\n Jason<\/span><\/p>\n P.S. – I know that many of you come to the blog multiple times a day – thank you – might I recommend in those moments when there is not a “new” post that you check out one of the posts in the “Best of the Blog” section?\u00a0 For example, I think the best piece that I have ever written, Solely Analytical Methods Are Doomed to Failure<\/a>, would be a good place to start.<\/span><\/p>\n P.P.S. – I am happy to note that this is my 800th blog post; wow, are my fingers tired!<\/span><\/p>\n","protected":false},"excerpt":{"rendered":" Across the European continent debt yields on existing debt are rising and indicate a growing level of fear about their nagging debt crisis.\u00a0 Specifically, last week yields rose in Portugal, Italy,\u00a0 Ireland, Greece and Spain – alias, the P.I.I.G.S. nations.\u00a0 But even the bonds yields of Europe’s strongest economy, Germany, rose this past week. […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-4510","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4510","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=4510"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4510\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=4510"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=4510"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=4510"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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