Spanish and Italian government interest rates have replaced Greek interest rates as the European canary in the coal mine.
Since they have become so important to commentators with respect to the prospects for the euro, and the European Union itself, we needed (and perhaps you may also want) some historical context to put the rates we hear daily into perspective.
(Please note that this is a data presentation. We do not add to the cacophony of voices about the future of Spain, Italy, the euro and the eurozone in this article. You have to draw your own conclusions on that, but if you have wanted historical interest rate context for your own view formation, this data may be useful.)
The following charts plot the 10-year treasury rates on a monthly basis for the United States, Germany, France, Italy, Spain and the United Kingdom from the time of the bottom of the U.S. stock market in 2009, as well as the time of peak interest rates in 1980. We present three versions of each chart -- (1) nominal rates, (2) rate spreads vs. U.S. rates, and (3) the ratio of the rates to U.S. rates.
The raw rates need to be compared to each other, but the usual rate spread approach loses its historical comparison utility over long periods where rates generally exhibit a wide range of values. Therefore, we think that the ratio of rates is important to examine for long-term historical reviews.
Figures 1 and 2 present the nominal rates for 1980 through June 14, 2012, and for March 2009 through June 14, 2012. Figures 3 and 4 present the yield spreads for those two periods. Figures 5 and 6 present the ratio of the rates those two periods.
(The rate data was sourced from the Federal Reserve through April 1, 2012. The June 14 rates were sourced from Bloomberg. The plot lines between April 1 and June 14 are linear interpolations, and do not reflect the actual May 1 and June 1 rates, which we did not have available.)
Figure 1: Nominal Rates from 1980
Figure 2: Nominal Rates from March 2009
Figure 3: Rate Spreads from 1980
Figure 4: Rate Spreads from March 2009
Figure 5: Rate Ratios from 1980
Figure 6: Rate Ratios from March 2009
The country rates were widely divergent until the euro was introduced in 1999, at which point they converged. They stayed fairly close together until the market debacles that began in 2008. The spreads are once again diverging. However, the ratio of the rates has not been anywhere near this great since 1980.
The "quiet period" for about 10 years after the 1999 introduction of the euro has ended. However, we don't believe the rates, spreads, and ratios are good predictors of the political decisions that Europe must now make.
What we see in these numbers is strong risk at both ends of the spectrum.
The U.S. and Germany have depressed rates that can't stay down there forever, creating substantial interest rate risk for holders of those government bonds, with negative real and after-tax cash on cash return during the holding period.
The Spanish and Italian rates can't stay up there forever, creating a binary situation on the other end for either capital gains if the situation is calmed, or capital losses due to interest rates spiraling up like in Greece, conversion of debt obligations to a falling local currency after a euro exit, or default.
We prefer to be far away from all of them (including U.S. Treasuries) because they are subject to unpredictable and rapidly fluctuating political decisions for which direction and magnitude are not reasonably knowable in advance.
Related Exchange-Traded Products:
- IEF (iShares 7-10 year U.S. Treasuries)
- TLH (iShares 10-20 year U.S. Treasuries)
- BUND (PIMCO German Gov't Bond ETF)
- BUNL (PowerShares Deutsche Bank German Gov't Bond ETN)
- ITLY (PowerShares Deutsche Bank Italian Gov't Bond ETN)
Disclosure: QVM has no positions in any mentioned security as of the creation date of this article (June 14, 2012).
Disclaimer: StopAlert.com is a service of QVM Group LLC, a registered investment advisor. This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.