Macro Watch – Europe & Central Asia: The yield curve for the euro area’s AAA sovereign bond has shifted downwards substantially since a year ago. Bond yield for 10-year AAA sovereign bonds declined by approximately 83 basis points, from 3.49% per annum in January 2011 to 2.67% per annum in January 2012. The yield curve also steepened relative to July 2011 as yields for bonds with shorter remaining time to maturity declined sharply. These AAA sovereign bonds are normally associated as securities with lowest credit default risks among similar fixed-income securities; these developments provide revealing insights into the capital market expectations across a wide spectrum of time horizons. In particular, the downward shift of the yield curve suggests a deteriorating economic outlook in the near future.
Average AAA Government Bond Yield Curves
Chart provided by: CEIC
At present, these expectations are largely supported as policymakers — among both the Eurozone leaders and the European Central Bank — begin to favour injection of greater liquidity into the market in an effort to improve the solvency of its banking systems, particularly in the embattled member states. This includes reduction in policy rates by 25 basis points to 1.0% in December 2011 and provision of cheap liquidity in its banking system, among other changes.
By Ian Lim in Malaysia – CEIC Analyst