In today’s links were two articles which highlighted the juxtaposition between declining sovereign bond yields and worrisome economic fundamentals in Spain and Portugal. Both are from Reuters. In the wake of the Draghi Put that the ECB applied with the announcement of its OMT program, yields in the periphery have come way down. Meanwhile the economy on the ground is still terrible. In Spain and Portugal in particular, this is worrisome.
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In both cases, I believe the austerity is too heavy and the deficit targets too ambitious for them to be achieved. At some point later this year, we will see both countries miss their targets as their economies underperform expectations. I, therefore, expect yields to back up until it is clear that the targets can be relaxed or until the countries formally request an OMT program bailout.