Wall Street Journal
November 25, 2011
Europe's anchor is slipping. Yields on German 10-year government bonds have risen 0.25 percentage point in the past week to 2.15% even as the euro-zone crisis has deepened. Until now, whenever the crisis has intensified, German yields have fallen and the yield premium for southern European bonds has risen. This shift is a sign the end-game is approaching—and may reflect a growing belief that the crisis will be resolved via the introduction of euro bonds rather than the euro's collapse.
Despite Germany's rising yields and Wednesday's poor debt auction, the market has few concerns about Germany's fiscal position. Finance Minister Wolfgang Schäuble may be able to balance his budget next year, four years ahead of schedule. German T-bill rates are close to zero or negative, suggesting investors are willing to pay for safety. After a long bull run, some investors may simply be cashing in ahead of year-end.
But investors are losing confidence in the euro zone itself. Japanese asset managers have publicly retreated from Europe; other safe havens are benefitting. On Nov. 15, 10-year U.S. Treasuries yielded 0.3 percentage point more than German bonds; they now yield 0.3 percentage point less, a startling reversal given U.S. fiscal challenges. The gap between German and U.K. yields is also shrinking.
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