Bonds: a Crisis Risk Indicator?

As a risk professional you've learned to classify an increase in bond's interest volatility (or standard deviation) as an indicator that bonds have become more risky. Right you are....

Now, with this knowledge, let's take a look at the next chart, presenting the long-term (10Y) interest rate of some of the leading EU member states from January 1993 to April 2014:

This chart clearly shows that :

• Since the introduction of the Euro in 1999, country spreads start declining
• Interest rates converge to the year of the famous (Lehman) crisis in 2008
• After the 2008 crisis, rating agencies wake up and spreads explode again

Let's take a look in more detail, by some log scale zooming......

To find out if the convergence of interest rates really is a kind of early warning crisis indicator, let's add some more EU countries to the chart.

Now the picture becomes clear: A structural decline in bond's standard deviation is not a decline in risk, but more the opposite....

As standard deviation decreases, (crisis) risk increases!

We can check this by looking at the cross-country standard deviation development in time:

These charts, presented on a vertical linear and log scale basis, clearly  illustrate that as soon as the standard deviation hits the 0.2% level, crisis can be expected soon.

Not only is the 0.2% SD-level an early warning indicator for the 2008 crisis that started with the bankruptcy of the Lehman Brothers bank, but it's also an indicator of 'Dot Com' crisis in 2000....

Finally
Meanwhile... as from February 2012, standard deviations are declining  again. Time to worry?

Key questions are:

• when will standard deviation hit the 0.2% floor again? 
• and when it does, will there be another crisis?

Remember lesson number 1 in risk management: Crises are unpredictable!
Nevertheless, once 0.2% SD  turns up: fasten your investment seat bells....

Links/Sources:
- Spreadsheet of charts used in this blog
- EU Interest Rates
- Big Picture Chart

Worldwide Country Bonds Overview

Country Bond Rates are decreasing. As global debt is still increasing, trust is declining. 'Counterparty Safe Cash'  is what's becoming more and more important. Prepare for getting used to negative interest rates!

BTW: If you can't hold your breath, go to the end of this blog and click one of the tabs to get an updated worldwide overview of actual country bond interest rates.

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What's up?

Countries with a high inflation (e.g. Brazil, India, China) or countries (e.g. Portugal, Ireland, Spain) that can't control and therefore have to finance their increasing debt at high interest rates, still show optical interesting interest rates for investors... So it seems, as these relative high interest rates are in fact 'compensation for inflation' or 'hidden default premiums'.

And of course we have countries (e.g Greece), who's interest rates show that they have in fact gone broke.

Unfortunately non of the EU countries dares to pull the plug...  From a risk management perspective: Living in a nuclear financial death zone, apparently is a better option than pulling the trigger in the knowledge that not only your Greek brothers but also YOU will be 'financial dead' for sure.....

Still the Greeks get away with this non compliance strategy, let's call it:

Greek Risk Management

Last but not least we have the strong countries like Denmark and Germany with low interest rates. These countries have to carry and finance their weaker brothers short term. So it all comes down on cash and counterparty risk.

The rhetorical question in this European business case is:

Can Germany finance a Europe that fails to restructure their debts in a sustainable way?

Country Bond Interest Rates in alphabetical order

Let's examine those interest rates as reported by Bloomberg, at the end of July 2012 in alphabetical order:

It's clear that country bonds interest rates vary widely across countries.

White spots in the table imply, there's no (Bloomberg) data available.

Let's bring some order in this bond-muddle, by ranking the countries on basis of their 10Y Bond yield.

Country Bond Interest Rates sorted by '10Y' Bond Rate

From the above chart it is clearly visible that

• Germany, Denmark and The Netherlands already enter the negative interest rate zone for 1 and 2 year bonds.
• Greece, with a phenomenal interest rate, is is completely burned up
• The Eurozone is split up in good and bad performing countries
• A strong, sustainable and relatively independent country like Switzerland has 'low short term', as well as 'low long term' interest rates.
  This must for sure be a warning to every investor to estimate long term interest for other countries  much higher on the long term. Perhaps the relatively higher long term interest rates of other countries resembles the implicit (extra) inflation expectation on the long run.

Mattress Money

As debt keeps increasing, economic growth in western countries is limited and modest inflation continues, short term interest rates will stay low for the near future (until the end of time inflation beast is released).

With an increasing 'cash demand' from weak performing countries, we have to learn to get used to negative interest rates in relatively more strong performing countries.

In other words, consumers and professional investors have to pay to put their money in the bank. Why not keep your money under the mattress?

For consumers this might perhaps be a risky (theft) solution  to consider. Professional investors however, have to reduce counterparty risk which demands first class collateral assets.

Therefore "mattress money" is no option for professional investors and (increasing) negative interest is the price these investors will have to pay for keeping more and more cash as debt and risk keep rising.

Desperate advice ;-)

Perhaps - just like World War II was financed by War Bonds - we should appeal to private investigators and consumer to fund the government in their desperate war against debt.... government debt ...

 But then.... who would be willing to invest?

Actual Country Bonds Interest Rates

Are you interested in following the actual country bonds interest rates, than bookmark this blog or the special Actuary-Info Actual Country Bond Rates Page, and come back once in a while to view the latest bond interest developments by clicking on one of the next tabs (have a few seconds patience, loading 150 (!) bond rates takes some time).

Actual Country Bond Interest Rates (Alphabetical)

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Actual Country Bond Interest Rates ('10Y' Sorted)

Update 2013 
Bloomberg stopped publishing a lot of bond rates. That's why several bond rates are missing. Sorry.

Hope you enjoyed this holiday blog...

Related Links/Sources

- View & Download 'Google Country Bond Rates Spreadsheet'
- Actuary-Info Actual Country Bond Rates Page

- View Google Country Bond Rates (Alphabetical)HTML and Bookmark!

- View Google Country Bond Rates ('10Y' Sorted)HTML and Bookmark!

- Bloomberg, Worldwide Best Financial Data Supplier 

- IS - LM Model Wikipedia

- On Negative Interest Rates (2012)