Greek Bonds Sink as Contagion Fears Gain Steam

Includes: ERO, EU, FXE, IEV, UDN, UUP, VGK
by: Ophir Chador

Greek bonds are plummeting in early trading today, with yields reaching record-highs since the country gained membership to the eurozone in 2001.

The yield on Greek two-years have surged 258 basis points to 12.71 percent, signaling ongoing fears of a Greek default in the near term. Also reaching a record high is the cost of insuring Greek debt through credit-default swaps, which have climbed nearly 60 basis points to 674. The cost of insurance, then, is $674,000 annually to protect $10 million worth of bonds for five years.

The bond market has further sharpened its focus on Portugal as the next EU member state requiring financial assistance. The yield on Portuguese 10-years rose to fresh highs of 5.13 percent, a 20 basis point gain over the previous session.

With market financing no longer an option for Greece, and quickly being ruled out for Portugal, the eurozone's hand is certainly being forced. The immediate and extensive financial assistance required by Greece puts the ongoing talks in Athens squarely in focus. However, the $60 billion bailout package currently on the table buys Greece a year at best, after which further financing will be needed.

Of course, the consequences of an EU-led bailout are dire. As a result of any such bailout, the trading bloc will be forced into the position of becoming the primary funding facility for troubled EU member states and the bond market will certainly hold the EU to its responsibility. Portugal, Ireland, Italy and Spain will all require EU-led financing measures once the bond market grows bored with Greece. The end result will be the degeneration of the eurozone's status to that of a junk bond until the trading bloc ultimately breaks up or breaks down.

Disclosure: Author is Short the EUR/USD