What is the stable equilibrium bond yield differential between Germany, with persistent chronic CAB surplus, and a country like Portugal just overcoming chronic CAB deficits ?
Will the PT-DE bond differential, currently around 1.5%, go below 1% as it did from 2000 to 2005 or will it test new peaks above 10% as in early 2012, when international investors were putting the entire burden of adjustment of the trade imbalances on the borrowing countries?
Just looking at the historical charts, 1% may be the lower limit for the differnential, and 2.5 % may be the upper limit, in part because of liquidity premia and other scale and structural differences. But since investment decisions are in the hands of surplus countries by definition, the risk of the differential increasing is greater, as the threat of a flight to "quality" is always present.
Quality really is the eye of the (be)holder, always skewed in favor of the imprudent lender at the expense of the the imprudent borrower. Stability is still missing.
Will the PT-DE bond differential, currently around 1.5%, go below 1% as it did from 2000 to 2005 or will it test new peaks above 10% as in early 2012, when international investors were putting the entire burden of adjustment of the trade imbalances on the borrowing countries?
Just looking at the historical charts, 1% may be the lower limit for the differnential, and 2.5 % may be the upper limit, in part because of liquidity premia and other scale and structural differences. But since investment decisions are in the hands of surplus countries by definition, the risk of the differential increasing is greater, as the threat of a flight to "quality" is always present.
Quality really is the eye of the (be)holder, always skewed in favor of the imprudent lender at the expense of the the imprudent borrower. Stability is still missing.
| yield 10 years, %pa | diff PT | |
| USA | 2,23 | 0,24 |
| PT | 1,99 | |
| CA | 1,92 | -0,07 |
| ES | 1,54 | -0,46 |
| DE | 0,36 | -1,63 |
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