Wednesday, November 16, 2011

French German Spreads Explode: US On Deck

The chart of the day today is once again dominated by the news out of France.

For the past 14 years, every trading day, French government bonds have traded alongside German bonds under the same status: risk free.

Then something changed this week.  The bond market woke up and decided this was no longer the case causing yields to diverge dramatically.  Contagion has now crossed the French borders, and it appears to be unrelenting as Bloomberg described the European government bond market as "frozen."


I have continuously discussed for years that when the debt markets move against you it happens in the blink of an eye, like a light switch being turned off.  Then the world you lived in the day before is gone.

This is coming for Japan, the UK, and the United States.  Every night Americans go to sleep not protected means they run the risk of waking up the next morning with a significant portion of your wealth gone (when bond yields rise bonds lose principal value).  This happened three weeks ago in Italy.  It happened this week in France.

As middle class America has spent 4 long years transferring their 401k's out of the stock market and into the "safety" of the bond market, which can be tracked every month through tic flows, they are now perfectly positioned to be destroyed by the bursting of the current bubble in bonds.

The herd will once again be slaughtered.

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