Photo: Wikimedia Commons
The action in the market today has us thinking back to something that Jefferies’ David Zervos told us in an interview a few months ago.”My endgame for Europe is: We lose a few people along the way, some losses are distributed to banks … and then you wrap the whole thing up in a toasty little eurobond, and then the ECB starts buying the eurobonds.”
“The endgame of fiscal union becomes a reality.”
Why are we thinking about this quote? It’s not as though anyone is actually talking about “toasty little eurobonds” today.
On the other hand, amid the European wreckage, there are some interesting market signals.
While everyone’s equity markets are getting crushed, and the Greek market is trading like it’s going to zero (almost literally), peripheral yields aren’t really doing all that much.
Italian yields are basically flat today. Spanish yields are virtually flat. And if you zoom out a little bit, yields in both countries have been trending lower for the last month.
Then if you look elsewhere in Europe, you see major tightening.
Finnish yields are plummeting. French yields are lower since Hollande won (thought they’re a touch higher today). And of course German yields are very low, thanks to the rush to safety.
The Finnish yield situation is actually interesting.
Remember, our Chart Of The Year for 2011 was a comparison between Finnish and Swedish yields. Back in November 2011, when things were seriously hitting the fan, Finnish yields started to spike, while Swedish yields (remember, Sweden still uses its own currency, and can print at will) plummeted. It was a great signal of the penalty that countries were paying to be in the Eurozone and not have currency autonomy.
Now let’s take a look at Finnish vs. Swedish yields. They’re moving in tandem, plumbing new depths.
Orange is Finland. Green is Sweden. The chart goes back a year.
Bottom line: The market isn’t acting like it’s expecting a full-blown contagious collapse. It does appear to be betting on a nasty end for Greece, but stability for much of the rest of the Eurozone.
Toasty Little Eurobonds ahead?