European Bond Yields 1/16/12

The trading week is underway in Europe on the heels of the France and other downgrades by S&P on Friday.  Thus far, the moves are muted with the euro slightly lower.  Banks are moderately weak but nothing drastic. The assessment of the effects of the downgrade on the EFSF continue. The Euro nations in need of funding the most will find it harder to borrow. Greece may be forced to default more quickly. Italy is not A-rated anymore and they need access to borrowing, thus, the Euro story is far from over. Ten-year yields across the board have increased slightly except for the perceived safety plays of Germany, the U.K. and U.S. all of which drift lower in yield as demand is high, and prices move higher.

10-Year Yields:
Greece 34.11%
Portugal 13.58%
Italy 6.68%
Spain 5.23%
Belgium 4.07%
France 3.07%
U.K. 1.97%
U.S. 1.86%
Germany 1.77%

Germany contines to play a tough game. Euro countries cannot grow their way out of the debt situation. Italy banks will need more collateral. The recent meetings and summits have become a joke since they only appear to promote can-kicking. Fitch rating agency said it does not plan on taking action against France's rating but Moody's, in light of the S&P downgrade, now says a France downgrade is on the table. Thus, one act of this soap opera feeds into another.  The China inflation and growth data over the next couple days are in the mix since their real estate bubble is popping which will impact the global economy.

The France yield climbed about seven basis points thus far after the S&P downgrade. France is most likely content with that reaction. Italy and Spain both jumped about 13 bips on the news. The U.S. markets reopen tomorrow morning.

Note Added 1/16/12 at 7:34 AM: Lots of folks commenting on the Portugal to Germany spread today. Using this morning's numbers, 1358-177 = 1181 basis points, an outrageous spread due to Portugal's uber high yield.  Looking back, in early December 2011, the spread was 1319-224 = 1095, thus, an 86 bip increase over the last month.  Portugal has moved well into the 13 %'s as Germany falls under 2%, under 1.9% and now under 1.8%.

Note Added 1/17/12 at 5:57 AM: S&P downgraded the EFSF yesterday but this news did not shake markets (except Portugal).  The conclusion is that the France and other downgrades were priced in to the equities markets. Traders, however, are getting all bulled up on anticipation of China easing, so this is boosting commodities and copper, which bounced equities last week. Thus, the buoyancy in equities are due in some part to China.  Staying with the European side, Spain auctions were uneventful this morning reinforcing the calmer tone. Italy 10-year yield is 6.50%, a drop of almost 20 bips since yesterday. Portugal is 14.27%. Spain is 5.10%. France 3.02%. U.K. 1.99%. Germany 1.81%. The flight to safety has slowed since U.K. and Germany yields are inching higher.  France, however, remains above 3%. Note the huge jump in Portugal yields, they are odd man out.  Therefore, watch Portugal closely as well as the Greece drama that will take center stage over the next day or two.