Since Standard & Poor’s cut the ratings of nine Eurozone countries, the euro has done nothing but rally. One of the main reasons why the EUR/USD has been so resilient is because the downgrades had very little impact on European bond yields.

French and Spanish bond yields have increased but by less than a tenth of a percent while Italian bond yields decreased since the S&P announcement. The following table compares the 10 year bond yield and 5 year CDS spreads of key EZ nations today vs. before S&P’s announcement. Five-year credit default spreads rose, representing an increase in risk premium but the uptick was nominal. The biggest consequence of sovereign downgrades are higher yields and borrowing costs but based upon 10-year bond yield spreads, troubled European nations have been spared from Armageddon for the time being.

 

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.