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When the so-called “bond vigilantes” attack a country, as they did Greece recently and Italy this week, policymakers wring their hands and there is a knee-jerk “flight to quality” – whatever that means.

But this is a market. Someone makes money on every trade. And in this case, that someone is the vigilante.

Consider. Since the start of the year, the effective rate on Greek government debt has climbed from less than 12% to roughly 18%. That's an increase of nearly 50%, the difference being paid in Euros that are currently worth about $1.40 to the dollar. That's some serious yield, and some serious profit.

Now it's happening in Italy. Despite a high private savings rate that actually makes its debt manageable, despite the government getting together on a package of austerity measures that will wipe out its annual deficit in three years, this week's sale of nearly $3 billion in bonds, denominated in Euros, drew a yield of 5.9%.

With stock markets around the world stuck in neutral, that's a pretty fat yield. Meanwhile the price of German bonds, also denominated in Euros, continued to rise.

It's an enormous yield spread, easily traded through an instrument like ITLY, which invests in Italian bond futures. A very safe way to play is through ENI, the giant Italian energy company, whose stock has recently rolled over. Or you can play the iShares Italy ETF, traded under the symbol EWI.

The point is that worry is an investment opportunity. You can play it through bonds, or stocks, getting in now and taking the trade off once a solution is found.

Why is this happening in government bonds, and why now? I think it's because of a shortage of play in stocks and other private equity markets. If the next market boom were in sight, investors would be playing there, and leaving governments alone.

So the solution to all this does not lie in the public sector, no matter what anyone tells you. It lies in the private sector. Give speculators something better to invest in, and the action will go there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I added some specific instruments for Seeking Alpha through which you can play this. Didn't include FIAT.PK because they're also leveraged through Chrysler to the American market, muddying those waters.

Source: Bond Vigilantes Show Private Sector Weakness