Government bonds and their yields

Amid the global decline in quotations on stock exchanges and commodity prices, investors' attention is increasingly attracted to the debt market, the dynamics of which has a direct impact on changes in exchange rates in the international market FOREX. In order to understand the mechanism of yield impact government bonds on currency quotes, it is necessary to refer to the basics of fundamental analysis.

Government credit and bond yields

The activity of any state in the financial sphere is characterized by a budget deficit or surplus. In the first case, the country's expenditures for various purposes exceed its revenues in the form of taxes or non-tax payments, which forces the use of public credit to cover the difference between them.

The main form of government credit at present is the issue of government bonds, the proceeds from the sale of which go to cover the budget deficit. Bonds, as a rule, are distributed to individual and institutional investors wishing to receive a guaranteed income. Initially, there is little doubt that it will be paid, since the whole state is the guarantor. Nevertheless, such cases have happened, and to avoid them international rating agencies carefully rank countries according to the risk of investing in their credit products. The higher the rating, the lower the interest rate on the bond, which is essentially the amount of debt that the government will have to pay back.

Private investors are guided by the size of bond yields (r), which in simplified terms is the ratio of income (I) to the exchange rate value (Pb):

As bond price and yield are inverse indicators, an increase in demand for debt securities leads to an increase in their quotations and, consequently, to a decrease in yields. Conversely, an increase in yields indicates a decrease in demand.

German government bonds

If we consider the European region, the lowest r have German government bonds, which indicates the high confidence of investors in the German economy and, accordingly, the ability of the country to use public lending at the lowest cost to themselves.

As can be seen from the figure, over the past few days, German bond yields do not exceed 1.5% and are at the level of multi-month lows. This indicates that investors are reluctant to take risks and invest money in stocks or currencies of those countries, whose central banks use higher interest rates. That's why on the the international FOREX market The American dollar and the Japanese yen are especially popular lately.

Spanish government bonds and their yields

Countries with lower credit ratings are forced to borrow at higher interest rates. For example, Spanish bonds are characterized by yields in excess of 6%.

According to representatives of the Spanish government, the country can not long service its national debt at current market interest rates.

Many European countries are implementing public debt reduction policies, which we will talk about in subsequent conversations. For now, we would like to ask readers whether the yield differential between German and U.S. yields could be government bonds to influence the dynamics of the euro/dollar currency pair?