Week 20, 2012: European Bond Yields

Summary: As the future of the Eurozone remains in the headlines this week, we take a look at how government bond yields have been moving over the past 3 months.

What does the chart show? The chart shows an index of daily closing yields (interest rates) on 10 year government bonds for five European countries (Germany in light blue, the UK in red, France in dark blue, Italy in green and Spain in yellow). An index (where yields on the 1st March are equal to 100) has been chosen rather than the yields themselves to more clearly show how they have been moving, rather than their absolute level.

Why is the chart interesting? Since March, there has been a clear divergence between yields for governments in northern and southern Europe. While Spanish and Italian bond yields are up roughly 30% and 20% respectively, bond yields for the UK and German governments are down 20% and 25% respectively. This seems to indicate that not only have investors grown more wary about lending to the southern European nations in recent months as events unfold in Greece, but that as a result of this they are putting more money into UK and German government bonds. This has pushed the cost of borrowing for the Spanish government up to around 6.2%, compared to 1.2% and 1.8% for Germany and the UK. This is a significant difference that spells trouble for the likes of Spain and Italy.