Chart B Yield spreads between selected sovereign bonds and German government bonds ( daily data basis points ) Ireland Greece Spain France Italy

Yields of acceding countries sovereign bonds denominated in key currencies remained at low levels .

The upward trend in euro area sovereign bond yield spreads , which began in early 2008 , continued well into 2009 ( see Chart B ) .

While a narrowing of sovereign bond yield spreads had been observed since March 2009 , at the end of the year and in early 2010 sovereign risk spreads in some countries experiencing particularly adverse fiscal developments diverged strongly from the average trend , most notably in Greece .

As a result , sovereign bond spreads for some euro area countries widened further . The most remarkable spread widening between end December 2009 ECB Annual Report 2009

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By contrast with the positive result in the real sector , financial markets exhibited a weak performance , characterised by widening sovereign bond yield spreads , declining stock prices and the interruption of the downward trend in interest rates .

10 years ago there, were very few countries that received sovereign ratings from the Standard Poors, Moody's and Fitch's.

Bond yields and stock prices in the euro area ( bond yields in percentages per annum

Yield compression vis à vis the euro area was partly due to the global emerging market bond rally , although the prospect of EU membership , together with the improvement of sovereign ratings , also appears to have lowered spreads .

High credit quality collateral is required to mitigate the credit risk of the counterparty borrowing liquidity from the Eurosystem .

Note Bond yields are average ten year government bond yields for the euro area .

When financial markets discovered that supposedly riskless government bonds might be forced into default, they raised risk premiums dramatically.

Interest rates on government bonds were racing upward.

In the course of 2003 there was significant progress towards a more widespread inclusion of CACs in sovereign bonds issued under foreign jurisdictions . In an effort to lead by example , the EU Member States committed themselves to including such CACs in their relevant issues .

Reflecting these increasing risks to fiscal sustainability , the widening in euro area sovereign yield spreads , which had intensified in autumn 2008 , continued well into 2009 ( see Box 7 ) .

Starting from January 2007 , the euro area ten year bond yield is represented by the ten year par yield derived from the euro area sovereign AAA yield curve estimated by the ECB .

Nevertheless , the improvement in the country 's public finances has helped to contain the long term interest rate differential .

Chart B Government bond yield spreads against Germany ( in basis points

Notes Before January 2007 , long term government bond yields for the euro area refer to ten year bonds or to the closest available bond maturity .

2 ) Long term government bond yields , 10 year bonds or closest available bond maturity .

2 ) Long term government bond yields ten year bonds or closest available bond maturity .

From the early 1990s and until around 1998 Swedish longterm bond yields tended to converge towards the rates of those EU countries with the lowest bond yields .

At first, both the authorities and market participants treated all government bonds as if they were riskless, creating a perverse incentive for banks to load up on the weaker bonds.

1 ) Long term government bond yields refer to ten year bonds or to the closest available bond maturity .

In the first quarter of 2009 ten year sovereign spreads vis à vis Germany thus reached their highest levels since the start of Monetary Union .

Euro area sovereign bond spreads decreased substantially overall from March , after they had reached new peaks at the beginning of the year . However , amid resurfacing concerns regarding fiscal solvency , sovereign bond spreads ended the year well above pre crisis levels .

Money market rates , government bond yields , stock market indices monthly data from January 1994 .

Therefore , the resulting sharp increases in nominal bond yields suggest Ta b l e A C h a n g e s i n e u ro a re a a n d U S that the higher inflation expectations more t e n ye a r g ove r n m e n t b o n d y i e l d s i n t h e than compensated for the probable declines in 1 2 m o n t h s p re c e d i n g o i l p r i c e p e a k s ( basis points ) long term real interest rates . euro area United States 46 152 73 20 4 24

In early 2003 , long term bond yields in the euro area continued to decline overall , even though bond yields changed little in the United States .

These global developments reflected the continuation of a trend which has been evident in bond markets since 1990 ( see Box 3 ) .

Underlying the moderate overall change in long term nominal bond yields in the euro area were slight increases in the real yields offered on ten year inflation linked bonds and

Long term interest rates refer to bonds denominated in national currency . 6

Chart 12 Long term real bond yields and break even inflation rates in the euro area ( percentages per annum

Like any other nation state, it is under pressure to push its Gross Domestic Product (GDP) rates up in order to attract investors to buy its sovereign bonds in the international market.

Over the last quarter of 2000 increasing concerns arose with regard to growth prospects in the region in view of , in particular , uncertain global developments in 2001 which , in turn , tended to widen the sovereign bond yield spreads over the last quarter of 2000 .

Countries in italics are endonyms or no longer exist as sovereign political entities.

In the US bond markets ten year bond yields dropped by around 130 basis points in the course of 2000 .

Long term interest rates were in line with developments in the global bond markets throughout the year and the differential with the euro area widened slightly , to around 50 basis points at the end of 2002 .

Chart 12 Long term government bond yields ( percentages per annum

The rebound in bond yields which started thereafter was mainly driven by upward revisions of market participants expectations for economic growth and inflation , but may also have been related to their mounting Chart 10 Long term government bond yields ( percentages per annum

After November these rates started to decline , reflecting the development of government bond yields late in the year . Global stock prices dropped in a volatile environment In 2000 , stock price indices in the world 's major markets did not continue the upward trend that had been apparent from 1995 onwards .

Overall , the financial markets coped relatively well with instances of international turbulence , as signalled by the limited response of sovereign bond spreads to events in Argentina and Turkey .

Note Long term government bond yields refer to ten year bonds or to the closest available bond maturity .

The decline in euro area long term nominal bond yields over this period therefore mainly reflects lower real bond yields , with inflation expectations remaining basically unchanged .