Tuesday, November 15, 2011

Europe's Unsustainable Markets

The situation in Europe feels unsustainable. The volatility comes and goes in waves, and each consecutive wave is worse than the previous. This morning Spain had a fairly bad bill auction (felt like Spanish banks ended up buying most of the paper) and European government bonds started unraveling. Spanish and Belgian bond spreads (to Bunds) hit new records. The most troubling is the selloff in French bonds. This is no longer the "fringe" of Europe, but the core. Below is the spread for 5-year French bonds - a new record.

Source: Bloomberg 

Simultaneously the interbank lending indicators continue to show stress. Below is a chart of the 2-year EUR Swap Spreads. We are now at levels not seen since late 2008.

Source: Bloomberg 

As scary as Europe looks, the US may be following a different path. More on that later on.
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