See the yields of Italian ten-year bonds (construction sector ) and those of similar ones Spanish Bonds (Bonos) converging to the value of the US 10-year interest rate is, for many, like seeing a pig in a tutu: when it's hot, an eyebrow raise fits in.
But the judgment changes if the situation is analyzed more coldly. Let's see why.
What influences long-term returns?
Since these are government bonds of different countries, but with the same maturity, simplifying a bit we can say that i main factors that influence the corresponding level of interest rates are three:
1. the perspectives of growth of the economy in real terms – the idea behind it is that the purely financial return offered by bond and that provided by investments in the real economy of a country cannot diverge beyond a certain limit (beyond which adjustment mechanisms are triggered between supply and demand);
2. the waited forinflation – the higher the risk of inflation, the more investors will want to be remunerated, in order to avoid the erosion of their gain in terms of purchasing power;
3. the credit risk perceived by the operators – the greater the risk of default of the issuer, the higher the yield required by the bondholder to buy the security.
Now all that remains is to carry out a check of consistency between the levels of interest rates in the three countries in question and the aforementioned fundamental factors.
Are the returns in line with the factors that are supposed to influence them?
One thing is not lacking on the financial markets: data. So they can quantify with a decent approximation the main variables that influence interest rates, thus proceeding to a (rough) consistency check. In particular, forecasts of can be used for real growth and inflation expectations political consensus of Bloomberg relating to the three-year period 2014-2016, while creditworthiness is based on the prices of 5-year CDS.
The USA has significantly better economic and price growth prospects than Italy and Spain. So, despite the US credit risk being significantly lower, it is entirely reasonable to expect that i US bond yields rise again.
But be careful not to "give in to the dark side", adding up the three figures beautifully for each country. It would be a gigantic naivety, because the reasoning carried out contains numerous approximations.
Indeed, in addition to one strong random component typical of financial markets, there are other factors that in the short term have an impact on the yield trend, influencing theinvestor appetite: among others, the expected trend of the US dollar compared to other major currencies, and the fear of systemic risks (for example the global financial crises, with the race for "safe bonds").
Furthermore, there is a discrepancy between the maturities of bonds and CDSs. Even the forecasts of the economists consulted by Bloomberg are limited to the next three years, and do not reach the ten years of the maturity of the bonds (after all, in aggregate, economists usually do not even correctly forecast the GDP of the current quarter, so that acceptable forecasts on horizons multi-year are unrealistic).
The historical perspective
Human memory tends to blur the past. But, looking at the graph, it is easy to see that, for a rather long period, which goes approximately by 1997 to 2007, the bond yields of the three countries in question were basically aligned. There is therefore no reason to believe that this could not happen again, if the fundamentals are consistent.
After all, on the markets it is customary to say that: “When the economy is bad, bonds are good”: low growth and inflation accompanied by scarce investments – a perfect portrait of the Italy of the moment – generally imply expansionary monetary policies. Precisely the conditions for low interest rates, in a period in which the systemic risk is normal.
