Italian, Spanish Bonds Hammered

U.S. Treasury yields bottomed out in July 2012 after three decades of a steady grind lower. Since then, they have had their ups and downs, but eventually, the yield on the 10-year U.S. Treasury hit a high of 2.06% on March 11, right before the financial crisis in Cyprus blew up and the consensus began to shift its focus to fears over an emerging slowdown in global growth. That backdrop set the stage for a big rally in Treasuries as investors piled back into them, sending yields all the way down to 1.63% on May 2.

Italian and Spanish bonds continued to slide, with the extra yield demanded by investors to buy them instead of safe-haven German bunds rising to euro-era highs as debt-contagion fears gathered pace.

Article written by Prieur du Plessis, editor of the Investment Postcards from Cape Town blog.This post is a guest contribution by Dian Chu, market analyst, trader and author of the EconMatters blog.

Marc Chandler submits:Spanish bonds have fallen each day this week. The 13 bp increase today brings the 10-year yield increase to 30 bp this week, easily the worst performing bond market within the euro zone. Portugal has the dubious honor of being in second place with a 19 bp yield increase. Pressure is also evident in the short end of the coupon curve. The 2-year yield is up 19 bp on the day and 32 bp on the week; again easily the word performer over the past five sessions.

The sell-off in government bonds has gone completely global as concerns over Federal Reserve tapering of monetary stimulus infect the market. Everywhere this morning, bond yields are up huge as investors dump sovereign debt. In the United States, the 10-year yield is up 6 basis points to 2.26%, its highest level in over a year.

Bill Gross echoes my statements that Germany is poised for a big hit either by a piecemeal breakup of the eurozone, by Germany indefinitely ponying up more money to keep the eurozone intact, or by Germany saying it has had enough and goes back to the deutsche mark. On Bloomberg TV’s “Market Makers” Bill Gross of PIMCO spoke to Erik Schatzker and Stephanie Ruhle today and said, “I would be leery of German bunds simply because there are only a few scenarios in which they can do well…Germany for me is a credit risk. It’s not an attractive market.”

The selloff on Spanish and Italian bonds continued today with yields in Spain hitting euro-era record highs. On the deficit side of matters, I do not believe Spain will meet its budget-deficit targets, and neither does Fitch. Fitch Managing Director Ed Parker said Spanish Prime Minister Mariano Rajoy will miss budget-deficit targets this year “by a substantial margin.” according to a Bloomberg report.