The concern for the financial soundness of the Eurozone continues to drive interest rates down. Investors simply question whether or not the EU provision (primarily, for Greece) is going to be enough to keep the financial challenges from spreading to other nations, notably Spain, Portugal, and Italy. Last week, the S&P rating system lowered Greece three levels to the junk grade of BB+, and Portugal by two steps to A-.
Spain’s five-year bonds recently traded at the highest yield since 2008, after a similar rating cut, as Spain has the euro-region’s third-largest deficit as a percentage of its gross domestic product. As a portend for the direction that all nations will ultimately need to take, Spain has pledged to reduce the ratio to within the EU limit of 3 percent of GDP in 2013, from 11.2 percent last year.
Traditionally, “flight to quality” effects are generally known to be short-lived, and can unwind positions quickly. But this news out of Eurozone doesn’t seem to be fading from the radar screen anytime soon. –Thus, interest rates will likely trade at this position, or perhaps lower, for the near future (again, always barring other market-moving news.)
As one indicator, the euro itself fell below $1.27, a 14-month low, as the ECB kept its main refinancing rate at a record low 1 percent at today’s meeting.
Technically, the market will be bullish (low interest rates) until we begin to trade at above 3.7%, at which point, the (technical) trend will reverse. So, with global news being what it is, and bullish technicals, I would not lock at this time.
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