The likes of Spain and Italy saw big bond rallies today on hopes the EU will formulate a bond-buying plan in advance of the EU summit next week.
German and Dutch debt was spanked, narrowing yield spreads.
Traders fear as the EU socialises debt and takes it out of private hands German finances will be undermined as they have to increase debt financing to meet increasing bailout commitments.
Lower peripheral yields are a strong euro positive. Rising German yields are a concern if the rise is not on the back of stronger economic growth but on the back of decreased credit quality are not.
If the trickle of capital leaving Europe in recent weeks as questions over German credit quality rose, it could become a flood in the case of EFSF/ESM bond buying. Such a program would be seen as “Euro bonds-lite”, and would force German rates higher in the process.
