The German 2-year note has dropped below Japan’s for the first time ever, with the German 2-year note yielding 0.109%, a record low. Japan’s 2-year note yield is 0.111%. Meanwhile, the 10-year bund is at 1.638%, nearing the record low of 1.636% from September.
All of this is happening as Spanish and Italian spreads widen considerably.
For me, it’s clear that this is a huge flight to quality. The ECB’s liquidity dodge can only last as a backstop for sovereign debt for so long. Either the ECB has to become more explicit in its backstops or the debtor nations in Euroland have to meet targets. I don’t see the Spanish (or anyone in the periphery) meeting targets. (Ireland has the best chance). That means you will see the same thing happen to Italy, Spain or Portugal as happened to Greece, with a death spiral ending in default for Portugal or who knows what for Italy and Spain.
As I said in January, the fireworks will start with Spain or Italy. My prediction then in my first newsletter was that "the ECB becomes more explicit about its backstops".
In any event, this process is now beginning – and Spain seems most vulnerable right now.
P.S. – The flight to safety and German Bunds reminds me of the flight to the dollar in 2008 and 2009.
