European Bond and CDS Spreads Continue to Climb

| June 24, 2011

Data released by the Atlanta Federal Reserve show that European bond and CDS spreads continue to trend higher.

Since the April FOMC meeting, the 10-year Greece-to-German bond spread has widened by nearly 400 basis points (bps) through June 22. The spreads for Ireland and Portugal have soared by 157 bps and 199 bps, respectively, over the same period. The CDS spread on Greek debt has widened about 500 basis points (bps) since the April FOMC meeting, while those on Portuguese and Irish debt continue to be high.

As expected, Greek spreads have surged to new all-time highs. It is also noteworthy that bond spreads for Ireland and Portugal have climbed to the same level as Greek debt in April. Spreads continue to trend higher gradually in other countries such as Spain and Italy, although they remain below their 2010 highs.

In late April, we observed that the US stock market was ignoring the recent surge in European spreads, although a negative divergence between treasury yields and the S&P 500 index suggested that a sharp correction in stocks was becoming more likely. Since then, the S&P 500 has declined nearly 7%, once again demonstrating the predictive merit of market divergences. As always, the keys are to notice them when they develop and understand what they are suggesting with respect to future market direction.

Category: Commentary, Market Update

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