Guest Commentary:Looking At the Debt Crisis Through Bond Yields

In the worst moments of the European debt crisis, bond yields were followed closely to determine which countries are close to the "bailout barrier" of 7%.

Where are 10 year bond yields standing now? They have certainly improved, but not always as expected.

Since Mario Draghi said he will do "everything to preserve the euro, and believe me, it will be enough" on July 26th, the situation gradually improved.

• Spain did not ask and isn't close to asking for a bailout, thanks to the big bazooka called OMT, which Draghi presented in early September. Spain was the epicenter of the debt crisis, and now sees its 10 year bonds at 5.11%. This isn't a low level, but certainly safe for the euro-zone's fourth largest economy. The peak was 7.62% on July 24th, just before Draghi's statement.

• Italy: The zone's third largest economy has seen an improvement in yields, but the political uncertainty and worries about the recession translated into a slightly smaller improvement: Italian bond yields are now at 4.34% from a peak of 6.60%.

• Ireland: The small country that received a bailout in November 2010 is enjoying very favorable yields: only 4.5%, blowing in Italy's neck. Unfortunately the unemployment rate doesn't follow the drop in yields. The peak was 14% in Ireland's worst days.

• France: Europe's second largest economy received quite a few scary headlines of late, with sensational departures of the rich and famous, and also with worrying PMIs. Nevertheless, French yields are at 2.11%, lower than around 3% early in the year, and not that far from benchmark German yields which stand on 1.52%.

• UK: Great Britain is not a part of the euro-zone, has its own currency and its own central bank that has launched one of the more aggressive QE programs. Nevertheless, yields stand at 2.08%, almost identical to France. Yields were floating around 1.50% in July, as money fled the euro-zone to the UK, which enjoyed some kind of safe haven status. As the crisis eased, so did the demand for UK bonds. This is the flip side of the euro-zone debt crisis.

Greece wasn't listed here - bonds held by the private sector suffered a nasty fate in the PSI and the buyback, and bonds held by the official sector are not on the market.

Will bond yields rise in 2013? Without prospects of growth, it will be hard for the struggling countries to keep financial markets calm.

Further reading: 5 Most Predictable Currency Pairs

By Yohay Elam, ForexCrunch

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