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Italian, Spanish Bonds Collapse vs Benchmark German Bunds

by Brett on September 5, 2011

While America was waking up to a Labor Day of BBQ and outdoor beer drinking, Italian and Spanish bonds were collapsing versus German bunds.

I would have sipped beer all day without a clue, were it not for our intrepid Euro bond expert Dr. Evil, who was kind enough to drop this jaw-dropping chart in my inbox this morning:

euro sovereign bond yield changes september 2011

Intraday yield changes in European sovereign bonds, as of 16:25 CET today. (Hat tip – Dr. Evil)

Check out the recent upturn in Italian yields:

Italy 10 year bond yield September 2011

Uh oh…Italy yields turn up again.  (Source: Bloomberg)

As investors scramble into German bunds:

10 year yield chart German bunds September 2011

The sexy stability of German bunds…is it just me, or is it getting hot in here? (Source: Bloomberg)

The ability to service your debt is getting quite trendy in Europe!

The euro sits at 1.40 as I type.  Many have wondered why the Europe continues to trade so high versus the dollar, with all of the sovereign debt troubles, and juicy excuses for money printing.  But hedge fund manager Felix Zulauf has been on point with regards to the euro – after the last Greece bailout, Zulauf shared his take with Barron’s:

In the short run, Felix says, the plan, as we’ve seen, allows investors to exhale and markets to rally. But once the touch of euphoria plays itself out, the omens are anything but bright. For one thing, the EFSF has only €440 billion in its vaults. That’s more than enough for humble folks like us, but scarcely enough if, as he deems likely, global growth slows and other troubled mendicant governments come cup in hand begging for a bailout.

The European Central Bank, moreover, seems bent and determined to continue to steer a tight policy course out of fear of misusing monetary policy to manage short-term economic problems. The result is sparse liquidity in Europe in contrast to abundant liquidity in the U.S., compelling the shakier members of the union to fund themselves via dollars and turning those bucks into euros. That makes the euro stronger but further weakens the competitive position of the peripherals.

Mario Draghi, the Italian successor to Jean-Claude Trichet as head of the ECB (the change is slated for September) apparently wants to show, Felix suspects, he’s more German than the Germans, which means the bank will be in no hurry to ease up. But come the next crisis and the bank will have to cave and switch to a more accommodative monetary policy. Once that happens, Felix predicts, the euro will take a mean spill.

Source: Felix Zulauf on the Greece Bailout

It looks like the moment of accommodative monetary policy truth could be fast approaching!


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