French-German yield spread.

[Gustaf]

Could somebody explain what drives sovereign bond yields up and down?  I understand how buying and selling works of course, but I don't understand what the traders are basing their decisions on, and thus, what the yields really mean.

They typically reflect the expectations on other investments and on inflation (so, basically, how interest rates will move). In the current case (between the states of the eurozone) they pretty much have to reflect different expectations on default.

[Gustaf]

Forgive my naivety, but what would be the short-term consequences of a French default on the world economy? Would it be able to be contained?   

http://www.youtube.com/watch?v=_eyFiClAzq8

[Gustaf]

Forgive my naivety, but what would be the short-term consequences of a French default on the world economy? Would it be able to be contained?  

It would really suck, but its not the end of the world!

The world has suffered similar big sovereign restructurings in the past.

If by contained you mean can it avoid a financial Armageddon? Absolutely. If by contained you mean will it be prevented from causing significant losses and slowdowns outside of France or even the EU? Absolutely not.


But ultimately its going to be Japan's default that will happen that is going to hurt the most not France's which I'm not convinced will happen.

I suspect that if France were to actually go the proverbial fan would be hit by the proverbial sh*t. I still think there are decent odds of it not becoming that bad though.

[Gustaf]

A large inflow of capital into the US might not necessarily be a good thing, since it would drive up the dollar again.

[Gustaf]

A large inflow of capital into the US might not necessarily be a good thing, since it would drive up the dollar again.

And it would hurt American exporters, no?

Yes, exactly. A stronger currency decreases relative competitiveness on the global level.

[Gustaf]

A large inflow of capital into the US might not necessarily be a good thing, since it would drive up the dollar again.

And it would hurt American exporters, no?

Yes, exactly. A stronger currency decreases relative competitiveness on the global level.

It's interesting, though, that the US trade deficit has grown so much in the past few decades.What are the reasons for that, historically? It started in the 1960s IIRC.

Well, one answer would be that the US has attracted a lot of capital during that period.