What the News on Bond Yields Say About the “Resolved” Eurozone Crisis

We are not entirely sure what a “resolved” Eurozone crisis is supposed to look like, but we are pretty sure it is not supposed to look like the chart below…

Panic in Madrid

A resolved crisis is not supposed to feature soaring Spanish bond yields and rising credit-default swap prices. In fact, the squiggles on this chart below may be the most disturbing images to emerge from Spain since Salvador Dali’s melting clocks.

Less than two months after the financial leaders of the Western World – you know who you are – informed the rest of us that they had vanquished the euro crisis, it has flared up anew in the “peripheral” credit markets of Europe. Peripheral is the polite term for the P.I.I.G.S. nations of Portugal, Italy, Ireland Greece and Spain.

In Spain, the yield on 10-year government bonds jumped to nearly 6% – the highest level since early December. Meanwhile, the price of insuring a 5-year Spanish government bond against a default (i.e. the 5-year CDS price), jumped to within a whisker of a new record high.

These are not the data points of confidence and comfort; these are the data points of resurgent distress. Bond yields don’t soar when investors trust the borrower; and default insurance doesn’t jump to near-record levels when investors are confident they will be repaid.

Bond yields and CDS prices are climbing throughout the financial markets of the peripheral European nations. Meanwhile, share prices on the European continent are tumbling. Despite a brisk start to the year, several European bourses have slipped into the red for 2012.

Perhaps this rocky price action reflects some “healthy” profit-taking and nothing more. On the other hand, healthy profit-taking can easily morph into a great big bear market when the underlying fundamentals are as suspect as the balance sheets of the PIIGS governments.

In other words, as we have mentioned more than once in this column, bankrupt entities tend to go bankrupt. So any time an investor lends money to an insolvent entity, he is playing a game of chicken…or as they would say in Spain, un juego del pollo.

Seven weeks ago, Dan Amoss, the editor of the Strategic Short Report, predicted that this particular juego del pollo was far from over. Even though the mainstream financial news agencies were busy cheering the end of the euro crisis, Dan was warning his subscribers to prepare for the next phase of it.

In light of this week’s dismal price action in Spain and elsewhere, Dan’s comments from March 2 seem both prescient and pertinent.


Eric Fry
for Markets and Money

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Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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