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A Truly Terrifying Chart

October 20, 2011 By Jeremy Jones, CFA

The chart below is the spread between French and German government bonds. Equity markets have rallied on hopes that an American-styleshock and awe bailout package from France and Germany can solve the euro-area’s debt crisis, but the bond market has other ideas. The French-German spread has blown-out to the highest level since the euro’s founding. Contagion is spreading to the core of the euro-area. Investors are beginning to doubt France’s ability to fund the multi-trillion dollar bailouts needed to solve the crisis. At a 114 basis point spread over German bonds, the market is rating France closer to single A credit rather than the AAA credit that rating agencies give it. If the French-German spread continues to widen at its recent pace, the euro will be toast in a matter of months. A defensive investment stance remains the most prudent approach.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. CNBC has ranked Richard C. Young & Co., Ltd. as one of the Top 100 Financial Advisors in the nation (2019-2022) Disclosure. Jeremy is also a contributing editor of youngresearch.com.
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