For the first time in more than two years, the yield on benchmark UK gilts fell below German bunds.
The yield on gilts, or long-term UK government bonds, is the interest rate at which the government will pay back the money to the bond holder.
The drop in UK gilt yields below Germany’s interest rate indicates that investors regard Britain as a safer bet, a sharp change for a German economy that is typically considered a safe haven and a powerhouse. The news is a bad omen from Europe’s largest economy, analysts say.
Countries that are considered high-risk, meaning that investors understand the chance that they may not get their money back, are paying much higher than the UK’s current 2.197% interest.
Italy has recently set its record for the highest yields on gilts since the euro was conceived, soaring above 7% last week. The skyrocketing yields rocked global financial markets, as the country’s borrowing rate was seen as unsustainable for the long term.
Countries who have previously sought EU bailouts, such as Ireland and Portugal, were forced to do so after surpassing the benchmark of 7% yields.
German auction ‘disaster’
Wednesday saw a German bond auction that was deemed a ‘disaster’ by many analysts, as the country was able to sell a third of the 6 billion euros in bonds it had on offer.
The startling outcome came as Fitch Ratings announced that France’s AAA credit rating could be at risk of a downgrade because of a sharper economic downturn that was predicted.
Germany’s failed bond auction, coupled with this news, rocked global financial markets as investors took these as signs that even the strongest of the eurozone economies could be open to contagion of the crisis.
Stock markets fell across the board, including London’s FTSE 100, which had its worst losing streak in 8 years. The FTSE Group commented that the last time the market fell for more than 8 days in a row was in January 2003, which saw a blue-chip index fall of 9 days.
Though the European Central Bank said that the disastrous auction results were due to “technical issues,” analysts say that the bonds were simply priced too high in the current risk-heavy environment.
Investors were offered just a 2% interest on German bonds, despite growing fears and dangers from the eurozone. Despite the excuses, analysts say investors just didn’t think the German bonds were worth the risk.