by Richard Barley
Wall Street Journal
January 28, 2012
Is the worst of the euro-zone bond-market crisis over? It's tempting to think so: Italian 10-year yields are under 6%, their lowest since October, while Spanish yields are well under 5%, a level not seen in over a year. January's bond auctions have seen heavy demand. And despite soaring Portuguese bond yields, there is not a hint of contagion.
The European Central Bank's December offer of unlimited three-year loans to banks has been key in easing tensions, helping to stave off a fire sale of assets and reducing the risk of a bank failure. A second loan will be granted in February. Economic data have surprised positively. And investors clearly became too negative in the fourth quarter. With Italy and Spain still key components of government bond indexes, previously cautious investors are boosting their underweight positions. Dutch pension funds, big sellers of Italy last year, have been buying in January, says one market participant.
Importantly, Italian and Spanish yields have fallen steadily despite concerns about Greece's debt restructuring and an imploding Portuguese bond market, where five-year yields now stand at 19%. The absence of contagion is illustrated by Ireland's success in swapping two-year for three-year bonds this week at a relatively low yield. Crucially, the governments of Mario Monti in Rome and Mariano Rajoy in Madrid are pushing ahead with ambitious structural reforms.