Are You Watching European Credit?

 |  Includes: FXE
by: The Fundamental Analyst

Whilst the stock market seems to be dismissing US recession fears and ignoring European default concerns, European bond yields continue to soar. As of Monday, the 2-year yield on Greek bonds stands at 105% up from 76% immediately after the announcement of the supposed ‘solution’ to Europe’s woes.

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How about Italy? Well as the chart below shows, the yield on Italian 2-year bonds is now 6%, higher than at any time during the worst of the financial crisis. No doubt uncertainty over the fate of Berlusconi is weighing on Italian debt but so too is a lack of confidence in the European debt crisis solution.

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Spain and Portugal are also moving back toward crisis highs. How long before France starts to see significantly higher yields? The message from the credit markets is loud and clear; the proposed solution to the European debt crisis lacks credibility. Mouthing platitudes is not going to cut it. The market wants to see action and needs to believe that European leaders can stop the contagion from spreading. Stock market investors should pay close attention to the machinations of the credit markets.