Sovereign Yields to Become More Credit-Like

Bill Gross released his monthly outlook. The highlight is the rising risk-levels of sovereign debt. Eventually, sovereign debt spreads under corporates will shrink as governments that absorb private sector losses look more like the credits they are guaranteeing.

Perhaps Bill said it best here:

Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.

Full Outlook