The European Disaster Indicators Are Looking A Whole Lot Better

Investors have been watching yields on Italian and Spanish bonds closely.

In particular, we’ve been following yields on short-term bonds that mature before the end of the European Central Bank’s three-year LTROs, the massive effort to boost liquidity. That’s because investors are more willing to take bets on the ECB’s cheap money, and so both governments have attempted to issue more debt at these maturities than longer-term maturities like five and 10 years.

Yields on all these bonds have fallen dramatically since ECB President Mario Draghi’s comments about “doing whatever it takes to preserve the euro.” This change has been particularly pronounced in the shorter-term variety.

Italian 2-year yields have fallen 36 basis points today, down to 3.7 per cent. These yields topped 5 per cent earlier this week:

Photo: Bloomberg

The same trend is evident in Spanish 2-year yields, which are down 46 basis points today. They neared 6.7 per cent earlier this week:

Photo: Bloomberg

But is this optimism warranted? FORGET THE RALLY: 10 Terrible Facts About Spain >

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