Take today’s Spanish 3-month bill auction which sold with a yield of 5.11% compared to 2.92% last month. Obviously, demand from the institutional side is nil. But if you’re in a position to invest for three months it’s compelling when US three-month bills pay 0.01%.
Bond traders and financial institutions subject to risks from mark-to-market accounting are continually at risk with rising yields (falling prices). Margin calls, capital ratios and corporate earnings pressure have repeatedly forced liquidation in periphery bonds.
The flipside is that the high yields are extraordinarily attractive to hot money. The high yields in European sovereigns signal deficit pressure and a chance of default/restructuring but that chance is still low and virtually zero within three months.
Whenever Europe appears as though it will stabilize, foreign money floods into these short-term investments.