Chart of the Year 2012

14 Jan

Naturally, there are many, many charts that help tell the story of the year that was 2012 in financial markets. But, if I’m forced to pick a single one I’d have to go with this particular chart and the story it tells of Spanish and Italian government borrowing costs over the course of the year.

Its no secret that continued issues in the Eurozone have defined the past few years, and at certain points it has looked like Spain and Italy were going the way of Greece, Portugal and Ireland. Italy started the year with its two year bonds yielding nearly 5%. However during the first five months of the year borrowing costs for both countries stabilised and fell, to around 2% by May 2012. A period of uncertainty and volatility then followed, as a number of financial market and political issues played out. Italian 2 year borrowing costs exceeded 5% by July 2012, and Spanish 2 year yields got close to 7% – a level which when it was exceeded by Portugal and Ireland resulted in a loss of access to the markets and a bailout. However the story in 2012 went somewhat differently, strong intervention by the ECB coupled with muddle-through policies from the European decision makers helped both Italy’s and Spain’s borrowing costs to stabilise and fall once again in the second half of the year, to around 2% in the case of Italy and 3% for Spain. Of course that’s not to say the underlying issues have been dealt with or gone away, but as for 2012, this is how things played out.

This drop in yields and surge in the value of Italian and Spanish government bonds laid the foundations for strongly positive returns in most equity markets (which largely posted double-digit gains) and other risky assets, particularly High Yield debt.

Spain Italy


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