Having taken the yield on ten year Greek bonds from below 5% in November 2009 to over 18% today the bond vigilantes have now turned their attention to Spain & Italy.
Greek 10 Year Government Bond (Source: Bloomberg)The yields on Spanish ten year bonds have risen by more than 13% since the beginning of July, while yields on Italian ten year paper have risen almost 18%.
Italian 10 Year Government Bond (Source: Bloomberg)
This sudden and steep rise in the cost of borrowing is hardly surprising. In fact, it’s surprising that it’s taken bond holders this long to begin demanding a premium to compensate them for the risk of being paid back in devalued pesetas or lira.
Since both countries need to borrow heavily in order to meet their existing obligations, these higher bond prices will only add fuel to the eurozone’s sovereign debt fire and if these higher rates persist they will certainly help it spread.