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Will Japan Save the European Periphery?

French Bond Yield

Via Joe Wiesenthal and Paul Krugman, we see that France’s borrowing costs have plummeted recently, down to 1.71 percent yesterday—almost the same level at which the United States borrows. Wiesenthal surmised that, despite the floundering Hollande government, investors have internalized that France truly is too big to fail and that the ECB stands foursquare behind it.

Maybe. But as the FT notes today, it might also have something to do with the Bank of Japan’s recent decision to start its massive bond-buying program. As yields on Japanese bonds drop, investors are looking to get better returns elsewhere:

“The amount of money in the Japanese government bond market that could leave Japan is monumental,” said Bob de Groot, a head trader at BNP Paribas. “We’ve just seen the tip of the iceberg so far.”[…]

“We’ve see big Japanese flows into Europe recently, and particularly into French bonds,” said Demetrio Salorio, global head of debt capital markets at Société Générale.

France’s 10-year bond yield fell to 1.71 per cent on Monday, a new record low and down from more than 2 per cent just a week ago. Austria’s benchmark borrowing costs also fell to an all-time low, while German, Dutch and Finnish bond yields were also close to their trough.

But the biggest impact was in Europe’s debt ridden periphery as the yield on Italy’s 10-year benchmark fell 11bp to 4.31 per cent, while Spain’s fell 9bp to 4.71 per cent.

We’re glad that Japan’s dramatic monetary policy is providing some badly needed relief to Europe’s bond markets and buying the Eurozone some time. We’d be gladder still if we thought the Europeans would use the time to organize an orderly unwinding of the suicide pact that European monetary union has become. That’s unlikely; Europe remains unable to stop its slow, shambling, zombie-like shuffle toward the cliff.

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  • Jim Luebke

    Isn’t this just a sign that Japan is trying to push yen into as many hands as possible to enhance its export sector, and buying other countries’ debt is the strategy least likely to trip “currency manipulation” red flags?

  • Andrew Allison

    Given the steady deterioration of the French economy, this would appear to be a frying-pan to fire strategy!

  • Kavanna

    This is frying pan into the next frying pan. France’s economy is a zombie, heading in the same direction as Italy. But it currently looks better than Japan, where something very, very bad is brewing.

    Look at the JGB prices — every prior QE announcement brought JGB prices up. So it was here — at first. But the last two days are something new, prices dropping, starting to show what’s coming.

    Of course, the Princetonian witch doctors will never admit the reality: that their hyper-Keynesian policies have led Japan down a long, dreary road to a dead end. National bankruptcy is a year or two away.

    France will come next. The USD will look good, even better — for a while.

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