By comparing levels of yield on government benchmark bonds across countries, and in the same country over time points, we gain information about the pattern of variation in investors’ collective assessment of the risks inherent in those bonds. Indirectly, that is information concerning investors' confidence in the issuers of the bonds. On this basis, we can transform the data into indirect Indicators of investors' confidence and pertinent governments. See chart below.
When attempting to interpret the results of calculations of numbers for the indirect indicator, an important caveat needs to be kept in mind. In some countries, the monetary authority may aggressively buy or sell a government bond, pushing the yield down or up a lot. That movement by the yield would tell you nothing about investors' confidence in the pertinent government. Thus, to make the best use of the indicator, we would need to know something about the composition of the population of buyers of the bond.
Keeping this caveat in mind, the chart suggests a rising level of confidence for Greece, and a reprieve in the fall of confidence for Italy over the past few weeks. There are also rising curves for Germany and the United States since late April. These could point to growing investor confidence; but for these countries a definitive interpretation requires an explicit assumption concerning the weight of the caveat just cited.
In any event, taken together the curves on the chart suggest an increased level of investor calm on markets for some key sovereign bonds. It remains to be seen how long this positive trend will last.
Notes about the design of the indicator, called "Sovereign Debt Confidence Indicator":
- The maximum level is 100. This level is reached when the bond yield is at or below zero. The minimum level is an undefined negative number whose value depends on how much the yield on the government benchmark bond lies above zero. The specific level of the indicator should not be our focus. Instead, focus should be placed upon the pattern that is formed by variation in the number over time or across countries.
- The scale on the right applies to Greece only. Thus, the values for Germany and Greece for the May 8 week are roughly 75 and -700, respectively.
- More detail on the design of the indicator is provided here.
