Monday Markets Mail #KW 43

on 19th October 2020

Will yields (in europe) remain low or are we facing a sharp rise?

© Adobe Stocks
© Adobe Stocks
Kathrein statement
Particularly against the background of the massive increase in national debt, there are repeated discussions and fears that a sharp rise in yields appears inevitable and that this will result in price risks for the entire bond market. We currently - and probably for quite some time to come - regard this risk for the market as a whole as negligible. Government debt, which in the eurozone at the end of 2019 was between 8.4% (Estonia) and 176.6% (Greece) of the GDP of the individual countries, averaging around 84.1%, is likely to rise by an average of ten to fifteen percentage points due to the massive debt and, in addition, the sharp decline in GDP for the average value. If this were the case for only one country, investors would react immediately, naturally taking into account the causes, questioning the debt sustainability of the government and demanding higher compensation for the risk. But if this happens to a similar extent in all euro area countries, and indeed globally, and if spending is seen as forward-looking - and this is largely true in crisis management - it should not be followed by an upturn in yields.

To put this into historical perspective, the average debt-to-GDP ratio at the end of 2000 (i.e. two years after the start of the European Monetary Union EMU in 1999) for the eleven countries starting the euro was between 7.5% (Luxembourg) and 109.6% (Belgium). Since then, it has fallen by 4.8 percentage points in Belgium but increased in all other countries. In addition to the large block of eight countries, where the increase ranges between 10 and 32 percentage points, the two countries hit hard by the crisis, Ireland and Portugal, stand out with increases of 83.8 and 75.8 percentage points respectively. Ten-year yields, on the other hand, have fallen sharply since then for the eleven founding members of the euro area.