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Yield Curve
So what is the yield curve which fascinates millions of traders each day, affects exchange rates, and reflects the actual level of short and long term yields in the economy?
Yield curve is a graph that shows on the Y axis the yield level and on the X axis the range of redemption. The points on the graph are existing bonds of various governments around the world (see review below). Each dot indicates the bond's redemption in X years with a Y yield.
In this review we will look in to different yield curves around the world through different dates and will show why Greece can't go out to the market, i.e. can't raise enough money and needs the assistance of the EU.
The first yield curve we will review belongs to the world's largest economy, the U.S.A., and is the benchmark to the rest of the world. As you can see below, the result of a crisis is the decrease of yield (lower graph) as a result of transfer of money from risky to solid assets, in this case, U.S. government bonds.
U.S Yield Curve
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A similar picture is obtained when considering the German yield curve, low interest rates today compared to higher interest rates in early 2007. Similar to the U.S., Germany served as a bench-mark in Europe and every country in the EU is compared to Germany. In addition, the countries spread change is also compared to the German yield curve. It can be seen that the bond for 10 years provides a lower yield than the U.S. bond, 1.88% compared to 1.98%.
Germany Yield Curve
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It can be notices that Italy's position is different compared to the U.S. and Germany, the level of interest rates today are higher than the interest rates in early 2007. This happened due to the risk level of the country which rose lately for fear that Italy will struggle to repay debts. (Italy's total debt is currently 1.9 Trillion Euro). This is the reason investors are seeking higher interest rates.
Italy Yield Curve
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We will conclude with the most problematic country in Europe, Greece, whose level of yield today is higher than any other country in the EU ever had. Today investors require the yield per bond over 200%, which doesn’t make it possible for the country to raise money and therefore Greece is in need of assistance from the Union. As it can be noticed in the graph, the bond for 10 years currently traded at 25% yield.
Greece Yield Curve
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