Week 31, 2012: Spanish Bond Yields

Summary: Spanish bond yields have risen steadily over the past six months as the markets appear increasingly nervous about the future prospects of the Spanish economy. Recent statements from the European Central Bank (ECB) seem to have made things worse.

What does the chart show? The blue line, measured against the left hand axis, shows the daily closing yield (or interest rate) on Spanish government generic 10-year bonds.  The higher this number is, the more the Spanish government has to pay to be able to borrow money.  The red line, measured against the right hand axis, shows the daily closing value of the IBEX 35 - Spain's main stock index, comprising the 35 most liquid Spanish stocks traded on the market.

Why is the chart interesting? Spanish bond yields have been climbing over the past six months, edging over 7% on a number of occasions (7% is a significant figure in bond markets, thought to represent the beginning of the end for recent recipients of international bailouts).  After reaching a peak of 7.62% at the end of July, they appeared to drop again, only to rise past 7% this week in response to a statement from Mario Draghi, President of the ECB, where he appeared to back away from the idea of helping the Spanish government.  It is interesting to see the reaction of the Spanish stock market, where the main index has fallen in value by almost 30% over six months as bond yields have been rising.  Unless there is good news soon, it looks like bond yields and stock prices will continue to suffer.