The bond market was thoroughly unimpressed with last Saturday’s $125 billion bailout agreement for Spanish banks. Since the announcement the yield on a 10-year Spanish government bond has jumped more than 50 basis points to 6.75%.
And the spread between Spanish and German bonds (i.e. the “safe haven”) has widened to more than 500 basis points:
Although it hasn’t received as much press, the 10-year Italian government bond is now above 6% and rising.
So the big question is this: “what will it take for yields to fall in Spain and Italy?”
Clearly the Spanish bank bailout wasn’t enough. Will it take some sort of major announcement like a fiscal or banking union across the continent to get the job done? Or will it be something else less dramatic?
These dangerously high bond yields have stock investors worried, and I personally don’t see how the stock market can make meaningful gains until they reverse course. What will it take to ease investors’ fears?
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Zacks Investment Research
