Interest Rate Blowout
Research for Online Investors

by John Dalt

11/18/11

Protesters were out in Athens, Greece and Milan, Italy yesterday.  Both countries have new governments, both need to pass more budget cuts, both have lost the confidence of bond buyers.  Spain and France are on the cusp of joining the club for austerity.

Interest rates on Spanish sovereign debt hit their highest level since 1997 at 6.98% on a 10-year bond auction.  French interest rates moved higher again yesterday.  France sold $9.41 billion dollars worth of 10-year bonds at 3.69%, 2% higher than similar German bunds.  This was the widest spread between the two country’s sovereign paper since the launch of the euro.

“Super Mario” Monti, Italy’s new Prime Minister has his hands full.

France is continuing to push the ECB to intervene in bond markets.  Germany’s Merkel said “If politicians think the ECB can solve the euro crisis, then they are mistaken.”   Britain’s Prime Minister David Cameron flew to Berlin last night to meet with Chancellor Merkel.  England is not a member of the eurozone monetary union, but he is fearful eurozone spiking interest rates will slow the continent’s economy and affect England.

Mario Draghi is the new European Central Bank president.  He feels the pressure to put downward pressure on interest rates.  He is concerned the ECB cannot do this, and wants the enhanced EFSF to become active and buy bonds.  He believes the eurozone governments are not moving fast enough to enable the EFSF to have the firepower to hold rates down.  Reuters reports he told a banking conference in Frankfurt, “Where is the implementation of these long-standing decisions? We should not be waiting any longer.”

Ireland took a bailout last December from the European Financial Stability Facility (EFSF), now they are going to increase their national sales tax by 2%.  Super Mario talked to Merkel and Sarkozy by phone yesterday and reassured them he is going to push through tough austerity measures in Italy and win back the confidence of financial markets.

CNN reports the ECB bought Spanish and French bonds on Thursday.  Here are closing yields for selected eurozone debt for 10-year bonds on Thursday; Spanish bonds 6.48, Italian 6.84%, French bonds 3.63%, German bunds 1.89%, Irish bonds 8.2% and Greek 10-year bonds closed yielding 29%.

Today's chart compares the 10-year government bond yield of the second (France) and third largest (Italy) euro zone economies to that of the largest (Germany). The crisis for these two relatively large economies really began to escalate in Q2 2011 and again in Q4 2011. Notice how the French 10-year government bond spread really began to increase over the past couple months as the severity of the Italian situation began to approach extreme levels. This is due in large part to the fact that French banks hold a great deal of Italian sovereign debt – and Italy has a great deal of debt outstanding (€1.9 trillion which equates to $2.6 trillion). It is no surprise the French want the European Central Bank to print significant amounts of euros.  This quantitative easing would allow the ECB to buy a significant amount of European debt.

Chart courtesy of www.chartoftheday.com

Someone shot at the White House with a high-powered rifle last Friday. My wife and daughter were in a tour bus and almost hit a man running across the street to his car after the incident. News reports were there might have been two men involved. Secret Service agents discovered one bullet hole in a White House wall and at least one window was broken. Oscar Ortega-Hernandez was arrested Wednesday in Pennsylvania and appeared in court yesterday. He was from Idaho, and is obviously not playing with a full deck. Obama wasn’t even home. He faces life in prison for shooting out a window. Call it terminal stupidity.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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