Are Bond Markets signalling Greek Contagion Redux?

While Stock Markets have declined by 15% from the peak in the USA and around 5-10% in the bigger European markets,the Bond Markets are signalling a bigger decline.US 10 year Treasury yields have been falling like a rock touching a 2010 low of 2.67% down from almost 3.8% during the 2010 high.This almost 30% decline in US yield is due to a combination of factors like expectations of more monetary easing by Fed,deflation worries and disappointing US economic data.In lockstep with the the US Treasury yields,the German bunds have also been rising.The rise in German Bunds is despite very strong German economic data.The German economy expanded at the fastest pace in 23 years on Rising Exports.So the fall in Bund yield is confusing when seen in terms of the US Treasury and Economy  relationship.The rise in German Bonds gets explained due to the rise in PIGS yields.The bond market has been selling the PIGS bonds leading to a rise in the yields to nearly the same level when the Greek Contagion hit the markets.

Spanish,Italian,Ireland and Greek Bonds Decline

Spanish 10 year   Bond Yields have climbed to 427 basis points while Greek ones are ruling at 810 basis points.Ireland which was the first ones to feel the effects of the GFC has also seen widening credit spreads of its Bonds.Italian Bonds are also seeing declining interest from buyers leading to higher yields for these as well.Compared to PIGS,German Bunds have hit a record high reflecting the 2 track economy of the European Union.

Spanish Bonds Fall on Economy Concern; Bunds Yield Record Low – Businessweek

Spanish bonds fell and the extra yield investors demand for holding Greek debt instead of German bunds rose to the most since May on concern flagging growth in nations on Europe’s periphery will crimp the region’s recovery.

German securities extended their gains, pushing 10-year yields to a record low, as falling stocks overshadowed data that showed the nation’s gross domestic product grew the fastest in two decades. Spain’s GDP rose less than forecast, while a report yesterday showed the Greek economy shrank for a seventh quarter.The yield spread between 10-year Irish bonds and benchmark German debt widened to 294 basis points today, the most since June 29, as investors bet the government will have to inject more capital into banks including Anglo Irish Bank Corp

Italian bonds declined after the demand fell at sales of the country’s five- and 15-year securities.

The yield on the 10-year Italian bond rose to the highest level in 10 days. Italy received bids worth 1.27 times the securities offered at a sale of 5 percent 2025 bonds, compared with a bid-to-cover ratio of 1.74 the last time the securities were sold on May 13.

Spanish Regional Debt a Cause of Big Worry

Spanish Banks have been in the news for their weak accounting and massive losses.After Restructuring the Cajas with a Multi Billion Euro Bailout,now the Spanish Government faces the Specter of defaulting regional government.Catalonia has been locked out of the Debt Market since March just like as BBVA was locked out recently.While the Spanish Financial Sector hangs on the ECB Funding Lifeline,the Regional Governments has no such Lifeline.Galicia and Madrid are the other regions facing major financing problems.While the provincial governments have agreed to cut fiscal deficits to 2.4%,the Market does not have a lot of confidence in these regions ability to rein in the costs.Fitch has put all the 10 regions on a possible downgrade notice.These regional governments have a backstop in the form on the Central Government which is itself facing questions of funding itself.

Spanish Crisis Faces Second Front on Regional Debt  – Bloomberg

Prime Minister Jose Luis Rodriguez Zapatero may face a second front in his battle to contain Spain’s fiscal crisis as borrowing costs for the country’s regional governments climb.

Catalonia, which accounts for a fifth of Spanish gross domestic product, has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year. Galicia, in the northwest, has asked to freeze payments of debt it owes the central government and the Madrid region postponed a bond sale last month.