Were European Bonds Mispriced In 2012 Or Are They Now?

How to properly value European Bonds

This seems to be the biggest question in financial markets for me right now because the math just doesn`t add up any way you slice it. When you look at the pricing for European bonds this conclusion jumps out from an analyst perspective, either European bonds were analyzed and incorrectly priced two years ago, or they are currently being analyzed and mispriced today! 
 

Possible Explanations for Large Valuation Gap 

 

 

Belgium 10 Year Bond Yield

One might say it is a little of both, the yields shouldn`t have been that high two years ago, and they shouldn`t be this low right now. However, the gap is just too large from a valuation standpoint to hold much water or relevance here. The next possible answer is that central banks have made interest rates for borrowing money so low that this has incentivized bondholders to accumulate more bonds in search of a yield vehicle to invest this ZIRPMoney. 

 

Ireland 10 Year Bond Yield

Also, the US QE Program of $85 Billion per month, much of this money may have found its way into the European banking and financial markets further incentivizing liquidity driven asset purchases of all kinds in Europe. But remember, Europe itself has done very little besides the main weapon of ZIRP compared with the United States, and these are European bonds we are talking about. But if it just comes down to ZIRP offering enough of an incentive to buy what were perceived as risky bonds for investors just two years ago, why weren`t these yields much lower as soon as ZIRP began in Europe? 

One answer might be that there was a scale issue regarding liquidity, and ultimately there was a lag effect, until liquidity reached a certain threshold, first of filling the deleveraging credit gap, then there is enough to spill over into alternative investments like chasing yield trades. However this two year period also happened to correspond with the $85 Billion QE policy in the United States, and this seems to have been some of the catalyst for ditching investments like Gold in favor of Yield Investments. There is also this ‘Binary Mentality’ in financial markets in evaluating an investment risk or trading strategy, it is ‘Risk On’ or ‘Risk Off’, ‘Yield On’ or ‘Yield Off’, or European bonds are ‘Safe’ or really ‘Risky’. 

Fundamentals in Europe Haven`t Changed