Reality Gradually Reappears In Euro Debt Markets

In one of my favorite novels ever, Ernest Hemingway's The Sun Also Rises, Mike Campbell is asked how he went broke.

"Two ways," he said. "Gradually and then suddenly."

Somehow I feel the European sovereign debt contagion will transpire the same way. Someday, very suddenly, it will matter very much. However, no one knows when.


Nov. 2 (Bloomberg) -- The European Central Bank bought Irish government bonds today, according to three traders with knowledge of the transactions.

The ECB purchased debt maturing in 2019 and 2025, one of the traders said under condition of anonymity because the deals are confidential. A central bank spokesman declined to comment when contacted by telephone in Frankfurt.

Irish 10-year bonds slid for a sixth day, driving the extra yield investors demand to hold the debt instead of German bunds to a record, as Finance Minister Brian Lenihan tries to build a budget for next year that convinces investors he can get the country’s finances in order. The premium on the debt has doubled since August and is now wider than the spread Greek debt had four days before the Mediterranean nation sought a European Union-led bailout in April.
(emphasis mine)

The Greek-German yield spread widened 19 basis points to 841 basis points at 10:29 a.m. in London.


Reality may be gradually reappearing, but not so for the ECB. Buying what no one else wants is rarely a good trade.