European Bond Yields 1/31/12

The E.U. Summit says the Greece talks will be finalized this week so new found optimism enters markets.  But, considering that this is the sixteenth E.U. Summit in the last couple years, perhaps the leaders are more interested in the free buffet's and luxury room's provided rather than resolving the constantly growing Eurozone problems.

!0-Year Yields:
Greece 34.27%
Portugal 16.81%
Hungary 8.93%
Italy 6.00%
Spain 5.01%
Belgium 3.69%
France 3.06%
U.K. 2.03%
U.S. 1.87%
Germany 1.83%

Portugal continues to blow out, now to 17% for the 10-year. Leaders say do not worry, there is no reason for concern.  Sounds like the recent Carnival cruise liner wreck where the ship employees told everyone to go back to their cabins and not worry. Portugal 2-year yield is on the verge of overtaking the 5-year which will create yield curve inversion across the 2's to 10's.

The euro is up this morning thus far.  The LTRO program has greatly helped in smothering the flames in the near term but, next week the BOE and ECB rate meetings occur and considering that Europe will need to weaken the euro, and BOE will move towards quantitiative easing, this current action may be the calm before the storm. While all eyes are focused on Greece, and finally Portugal, as we highlighted here a couple weeks ago already, Hungary may be the trouble in the background no one is discussing now.  Hungary 10-year yields have jumped 16 basis points in the last 24 hours and now about to move above 9%.

The heat on Germany should increase moving forward in light of Germany's unemployment rate reaching a record low while Italy's unemployment rate reaches a record high. The dynamic is shifting away from the direct focus on Merkozy (Merkel and Sarkozy).  Changes are occurring in the Italy and Greece governments, and perhaps France in the coming weeks, which is placing a stronger spot light on Germany moving forward.