La Grande Divergence

Great chart of eurozone sovereign 10-year yields from Desmond Lachman of the American Enterprise Institute.  We made a decent living off the “great convergence trade” of the 1990’s, where yields of the eurozone sovereigns collapsed on top of each other.  This sent the Belgium dentists into a yield panic and contributed to a massive global tightening of credit spreads from U.S. high yield to Ecuadorian corporates.

Those were crazy daze.   We recall one sovereign deal in Panama oversubscribed to the tune of 25% of the country’s GDP!   That is,  bond investors,  in just one new issue, were willing to lend to the government of Panama in the amount equivalent to 25% of its GDP.   Efficient markets, anyone?

This is also a great chart in the context of today’s announcement leakage of Europe’s big bang sovereign/bank bailout, which is positive as the Eurocrats now recognize the seriousness of their problems and have finally stopped fighting the markets.   We just don’t know how the German and Finnish taxpayers are going to react to taking on leverage to convert the EFSF into a potential trillion euro bailout fund; not to mention how the Greeks respond to having their pensions cut by 40 percent.

The climax of Europe’s existential crisis is upon us, folks.   The political noise in Europe is about to grow much louder.  The deal risk is high and we’re watching how this reflex rally, which needs Asian market confirmation,  plays out.   Chalk up another nutcracker.

(click here if chart is not observable)

This entry was posted in Black Swan Watch, Bonds, Budget Deficit, Euro, PIIGS, Sovereign Debt, Sovereign Risk and tagged , , , , , . Bookmark the permalink.

1 Response to La Grande Divergence

  1. Jan says:

    Hi, could you please tell me the source you found the graphic of the sovereign spreads? Im currently writing my thesis and have been looking for this exact illustration for days. Would really help me a lot!

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