Due to forced selling by investment grade managers, Greek bonds are down sharply following the belated downgrade of their credit rating by Moody’s. The selling in turn is dragging down the bonds of the entire region with Spanish yields in particular rising to fresh 20 month highs. This action is a prelude to the biggest event of the week on Thursday, the sale of 10 yr and 30 yr Spanish debt. Spain today sold 12 mo bills at a yield 71 bps above the one a month ago. The equity markets in the area are higher however as it also shrugged off a big drop in the German ZEW 6 month economic confidence outlook # which fell to 28.7 from 45.8, well below estimates of 42. BUT, current expectations (helped by weak euro and export growth) rose to the highest since Sept ’08 and that calmed investors. Signs of banking stress still exist as the 3 mo Euribor money market rate (mostly European banks) spread to 3 mo EU LIBOR is just shy of a record high.
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