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Europe’s Bond Market: Is Another Credit Crisis Looming?

Originally published by U.S. News & World Report on March 15, 2017 Read the original article.

With many global financial markets still elevated, expectations of inflation are in the air.

Read this excerpt from a March 15 U.S. News & World Report article:

The demons of deflation are being consigned to the past by a pick-up in price pressures globally, prompting investors to seek protection in inflation-protected bonds.

New Zealand sold its first inflation-linked bond in over two years earlier this month and, in a sign of nascent demand, Italy last week seized the opportunity to sell 3 billion euros of so-called linkers via a syndicate of banks.

Even so, EWI’s March European Financial Forecast offers another perspective about the Continent’s credit markets, including Italy’s.

After reviewing Greece’s renewed debt crisis, the publication showed this chart and said:

Investors are beginning to abandon the bonds of one of Greece’s main creditors: France. On February 7, French 10-year notes sank to an 18-month low, sending French spreads over German debt (top chart) to their widest level since early 2014. Dutch and Italian spreads (middle and lower chart) have likewise widened, recently touching respective three-year highs.

Credit spreads are a critical measure of investor confidence, because they indicate the rising premium that investors are demanding to hold lower quality debt.

The March European Financial Forecast also commented that the bond market is behaving much as it did before previous credit crises in 2008, 2010 and 2012.

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