First, the ECB s renewed bond purchases must express the clear intention of reducing sovereign interest rates to sustainable levels, which are at least 200 basis points below their July averages. A high level German diplomat reportedly dismissed Spain s 6.5 7 interest rates recently, on the grounds that Spain borrowed at nearly the same rates in the 1990 s.

Noting the increasing voluntary use of collective action clauses in sovereign bond contracts by both developing and developed countries,

Last year, the eurozone was on the verge of a double dip recession. When it recently fell into technical deflation, the European Central Bank finally pulled the trigger on aggressive easing and launched a combination of quantitative easing (including sovereign bond purchases) and negative policy rates.

Italian bond rates had already been falling before ECB President Mario Draghi announced the conditional bond buying plans. That reflected the substantial progress Italian Prime Minister Mario Monti s government had already made.

Though interest rates across the European Union are at historic lows, government debt in the eurozone could come under severe pressure should bond markets re evaluate the riskiness of sovereign borrowers. That is a consideration that should weigh heavily on indebted governments as they submit their budgets for scrutiny to the European Commission.

Under the OMT program, the ECB can replace foreign outflows from sovereign bond markets through direct purchases, putting Spain on par with non eurozone countries like the United Kingdom. And, to the extent that there is even an informal price target associated with the ECB s commitment to purchase bonds, foreign outflows, at least from the sovereign bond market, are automatically replaced, in full, with ECB cash.

That is likely to be a money losing strategy unless an investor is sagacious or lucky enough to sell the bond before interest rates rise. If not, the loss in the price of the bond would more than wipe out the extra interest that he earned, even if rates remain unchanged for five years.

In 1994, rising short term rates caused increases in long term rates and declines in long term bond prices that were at least double what standard models at the time were predicting. Moreover, interest rates in the world's peripheral, developing economies rose far more than rates in the advanced industrial core.

Third, Germany s long term interest rates would be unaffected, because Germany would neither be guaranteeing the debt conversion scheme nor backing the ECB s bond issues.

Thus, the recent problems faced by Greece are only the tip of a sovereign debt iceberg in many advanced economies (and a smaller number of emerging markets). Bond market vigilantes already have taken aim at Greece, Spain, Portugal, the United Kingdom, Ireland, and Iceland, pushing government bond yields higher.

LONDON In 2011, the Nobel laureate economist Paul Krugman characterized conservative discourse on budget deficits in terms of bond vigilantes and the confidence fairy. Unless governments cut their deficits, the bond vigilantes will put the screws to them by forcing up interest rates.

My name is Bond, Jamal Bond.

One could emulate J.P. Morgan, whose standard response to questions about stock prices, bond prices, and interest rates was to say simply, The market will fluctuate.

Like the World Bank, United Nations budget assessment payments are obligations of Member States, and accordingly United Nations obligations (i.e., the bond issue) would probably be eligible to be defined as quasi sovereign.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

CAMBRIDGE Six months ago, I wrote that long term interest rates in the United States would rise, causing bond prices to fall by so much that an investor who owned ten year Treasury bonds would lose more from the decline in the value of the bond than he would gain from the difference between the bonds interest rate and the interest rates on short term money funds or bank deposits.

The healing process is also evident in Europe, though, unfortunately, it is effectively limited only to sovereign bond markets. The real economy remains under enormous pressure in several countries, as economies contract and unemployment remains alarmingly high.

Bond offering

Nominal interest rates for periphery countries sovereign debt have remained extremely low, and, even when taking into account expectations of very low inflation (or even deflation), real interest rates are low. The eurozone now is facing not only a financial crisis, but a stagnation crisis.

The ECB has promised to buy Italian and Spanish sovereign bonds to keep their interest rates down, provided these countries ask for lines of credit from the European Stability Mechanism and adhere to agreed fiscal reforms. Germany s Constitutional Court has approved the country s participation in the ESM, and Chancellor Angela Merkel has given her blessing to the ECB s bond buying plan, despite strong public objections from the Bundesbank.

The US sovereign debt market shows no similar evidence of having reached a limit yet. But bond markets do not issue many early warning signals witness the sudden run up of yields in Italy and Spain a year ago.

Savings Bond Inventory

Some might assume that bond markets are shielded from the effects of climate change, ecosystem degradation, and water scarcity. With more than 40 trillion of sovereign debt in global markets at any given time, that is a very high risk game.

We are all sovereign States, with sovereign rights and responsibilities.

Moreover, financial markets consider QE so likely that the largest part of its bond rate and exchange rate consequences have already been priced in. Should the ECB disappoint expectations, bond and foreign exchange markets would confront an abrupt and damaging unwinding of positions long term interest rates would rise, stock markets would sink, and the exchange rate would appreciate.

When the markets see that coming, they will drive Italy s sovereign interest rates even lower. Given Italy s very large national debt, interest payments add more than 5 of GDP to the fiscal deficit. The combination of economic recovery and lower interest rates would produce a virtuous dynamic in which falling interest rates and a rising budget surplus are mutually reinforcing.

The Stock Bond Disconnect

Another factor impeding QE s impact in the eurozone is low bond yields, which, by increasing measured pension fund deficits, make some companies reluctant to invest and thus more likely to raise contribution rates and limit pension benefits. In the US, more generous assumptions regarding discount rates are used to calculate pension fund liabilities.

In fact, the 30 year inflation indexed US government bond yield as of May 4 was only 0.86 , compared with more than 4 in the year 2000. Such rates are similarly low today in many countries.

Bond lending involves diversified groups of bond holders, including domestic residents, and can be issued under different jurisdictions.

It was very James Bond.

But for every market mispricing there is a profit opportunity if long term interest rates are, indeed, too low and long term bond prices too high, investors will short long term US bonds, park the money elsewhere, wait for bond prices to return to fundamentals, and then cover their short positions. By doing so, they will push prices close to fundamentals today.

Europeans, too, have become dependent on low interest rates, with the European Central Bank as the key stabilizing force. Without the ECB s commitment, in place since 2012, to prevent sovereign debt yields from soaring, there would be a persistent risk to the eurozone and, indeed, to the entire edifice of the European Union of sovereign debt defaults.

Argentina s Sovereign Bondage

Sovereign Environmental Risk

Green Sovereign Wealth

Sovereign of humans,

a An option was included to convert US 30 year bond into a US 12 year bond with debt reduction.

Which actors have played James Bond?

How Scary Is the Bond Market?

And many others bound in bond.

And many others bound in bond.

Debt service coverage and bond interest

One reason for this is that long term interest rates are affected not just by the actual bond purchases, but also by financial markets expectations about future monetary policy. Indeed, just one day after the ECB made its announcement and weeks before the purchases began interest rates fell by a fraction of a percentage point throughout the eurozone.

With tax revenue collapsing and expenditure ballooning, the government found itself running such large deficits that the markets were spooked government bond prices collapsed, interest rates soared, and the country found itself unable to finance its deficit. Where were the rock bottom interest rates that are supposed to characterize periods of weak growth and high unemployment?