Review & Outlook

Our take on the investing, financial, & economic themes of the day

Mis-Pricing Risk: European Edition

In April I commented about how central bank policy causes investors to mis-price risk.  The Wall Street Journal notes that 5-year yields on Spanish sovereign debt  have fallen from above 7% in 2012 to below those of U.S. Treasurys and Irish 10-year bond yields are below U.K. bonds of the same duration.  In 2011 Irish 10-years yielded nearly 14%.

spanish bond yields

 

The trouble for the European Central Bank is that investors have now priced in their assumption that it will begin large-scale bond purchases.  If it fails to do so, there will probably be a shock to the bond market.  But if the ECB follows its expected course, it may not have any additional effect to the already-low prices.