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.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- Wal-Mart Shares Soar - November 17, 2017
- Is This the Start of a Major Downturn or Just a Healthy Correction? - November 15, 2017
- Are Stocks Cheap Because Interest Rates Are Low? - November 14, 2017