4.48 vs 6.06


The widely anticipated move by the European policy makers was well received by the global equity markets.  Although the 50% voluntary haircut in Greek debt and levering the EFSF four to five times for around a trillion euro fund to backstop the potential contagion was cheered by the equity markets, once again the droll credit/bond analysts have not bought it.  The European and US markets rallied hard on the news with the Dow Jones rallying 4.48% in the last few days. However the bond markets were unmoved and in fact yields rose a little for Italy – one of the profligate issuers of debt in Europe. One could argue that most of the debt is borrowed internally unlike say Greece and the country does have a robust manufacturing industrial base unlike Greece. But that being said, on Friday, they paid the most for their 10 year debt since joining the Euro in 1999 reflecting a yield of 6.06%. This is up from 5.84% only last week. The PIIGS threshold yield was approximately 7% where that pushed them into problem territory. The problem with Italy is that it is the #3 issuer of debt ceded only the US and Japan.  So there is a global push and pull right now between the equity and credit bulls and bears. The question is if this is such a good plan then why are yields rising – they should be falling.

Bottom line: given that the bond market dwarfs the equity market, I remain unmoved and I am selling into this rally.

Italy is too big to fail, too big to bail…

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