Italy and Spain Bonds Crushed

Yesterday, you saw the Italian and Spanish government bonds get crushed on weak Eurozone economic data, something we have not seen in a very long time.  This was while Bunds rocketed higher in price, lower in yields.  This kind of blowout in spreads between PIIGS and German debt is rare these days.  The bullishness in European equities is irrational, unless you get a huge QE, which is possible, but not very likely.  More likely you get a QE lite from Draghi, who prefers words over actions.

The search for yield in junk bonds, leveraged loans, and PIIGS debt has pushed the yields to extreme lows on risky debt.  It got to the point where Spanish 5 year yields were lower than US 5 year yields a couple of weeks ago.  The reach for yield is near its end game.  Yesterday's blowout in Italy-Germany bond spreads was a warning shot.  The bulldozer is gathering steam.  Anyone continuing to buy junk bonds and PIIGS debt is picking up dimes and quarters in front of an accelerating bulldozer.

I was surprised to see the market go down yesterday, because the SPX has ignored all kinds of signs of a slowing economy.  Sentiment is not bullish, just complacent.  It seems like a lot of people in the middle, not too bullish, not too bearish.  A bunch of neutrals.  It makes it tougher to predict when you have a lack of extremes.  There are no easy trades in equities right now.

I would rather focus my energies on bonds, where a shift in money flows is palpable with each passing day.  There is now a clear trend in bonds.  Unlike shifty equity markets, the bond market takes time to change directions.  The bond market is like a giant cruise ship, it takes a while to turn but when it does, it goes on for a long time.  It looks like we've made the turn this month, and it has a ways to go.  I expect 10 year yields to stabilize a bit here, but it will not go back up much.  There will be steady pressure lower in yields as money flows in.  And there is a lot of money to flow in as most are underweight Treasuries.