WSJ: European Bonds Are Defying Gravity
It’s amazing the things a low interest rate environment will make you do… including lend money to Italy and Spain for ten years at ~4%.
WSJ: European Bonds Are Defying Gravity
The bond markets and the economies of Europe’s struggling countries tell two very different stories this year: One is rallying; the other, sinking.
Bulls say the ECB’s intervention has significantly reduced the risk that Italy or Spain could default on its debts. Nick Gartside, international chief investment officer for fixed income at J.P. Morgan Asset Management, says the ECB’s pledges “provide a sort of cloak of certainty and a very important foundation.”
Others are less sanguine. “The markets are overestimating the capacity of the European Central Bank to intervene in case of need,” said Roberto Perotti, an economist at Bocconi University in Milan. He argues that Italy is essentially too big to save, even by the ECB, if it ran seriously aground.
And Italy’s weak economy raises its risk: Without economic growth, it is difficult to contain Italy’s huge public debt—the second-largest as a proportion of GDP in the euro zone, after Greece.
Photogenic Thoughts 
This is surely predicated on the belief that the ECB will, at some point, engage in appropriately expansionary policy.
To some degree, yes. I don’t think the ECB has been as expansionary as the Fed or the BoJ and they’re likely feeling the need to play catch-up. Would love to see a chart comparing their monetary efforts. It’s also harder for the ECB to act in a bold way given the setup of the Euro – such a wide variety of countries / economies / cultures involved makes for a challenging political environment. I’ve heard a lot of pundits advising to short the Euro for the same reason – they’re expecting the ECB to act.