I know spread to bunds is a more relevant measure but when German 10 year hit 1.745% and French 10 year yields hit 3.49% it was too hard to resist pointing out.
Mr. Sarkozy’s reckless abandonment of fiscal prudence in any form is starting to have real consequences. I’m sure he won’t pause and change policies since it will be obvious to him that it is evil speculators and not his EU policies nor the French banks’ bad decisions nor his bailout of Dexia that have led to this divergence.
In CDS land – to the extent it is still relevant – Germany was trading around 95 and France was over 200, but I think Finland and the Netherlands are more interesting. Finland was trading at 65 – so 30 better than Germany and Dutch CDS was at 105 so only 10 wider than Germany. The credit markets are rewarding the prudent. Finland has been the most conservative in the bailout rush, but Holland has also shown some restraint, and the market is aware or it, and is rewarding them as they should be rewarded.
This isn’t an “attack” on France or Italy – it is the fear that a small pittance of interest isn’t enough to cover the default risk. France is still fine and relatively tight but is a clear indication that rhetoric and bailouts have a cost. With Dexia CDS still wide it’s not even clear what Belgium and France did or got from that intervention.
We are due for an ECB massive purchase program rumor at any moment – but I think it is still too early and not enough other steps have been taken to get Germany on board.
The ECB is likely considering an emergency rate cut but I’m guessing are reluctant because it would indicate a bit of panic (they are in panic mode – they just don’t want to indicate it) and there may be real concern that if they do another rate cut and sovereign bond yields don’t respond (they did NOT respond for long after the recent one) they will lose a possible tool. It may be better to keep it in reserve and pretend they can cut rates and impact the market, rather than cutting and risking failure.
I can’t help but think French yields may start to impact corporate yields – I’m not a big fan of their policies, but bunds + 175 is at least a little intriguing. Unlike Italy and Spain which might compete for some HY allocations, this could compete directly with some corporates.