If you look only at the current rates of return in the bond markets, you might think that the industrial nations are in a recession. A mere 2.9 percent yield for 10-year US Treasury bonds is as incongruous to the expected US economic growth of 3.5 percent in 2010 as the 2.5 percent returns of 10-year federal bonds are to the booming labor market in Germany. Have the markets gone crazy? No, these weak interest rates on one hand indicate that investors are taking flight to safe harbors, and on the other hand act as a precursor to a significant weakening of economic growth.
A day like a life: Events of March 24, 2010, reveal a great deal about the situation in the capital markets. First of all, there was the debt crisis. On that day, Fitch lowered the rating of Portuguese creditworthiness from AA to AA-. A budget deficit equal to 9.3 percent of the country’s 2009 gross domestic product, coupled with doubts about the potential for a rapid recovery, induced the rating agency to make the downgrade. As the report made the rounds, recollections of the Greek drama of the preceding weeks were aroused. The majority of European stock indices fell sharply into negative territory.
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