If the impasse over extending the U.S. debt ceiling isn’t enough to preoccupy you these days, then consider that the European debt crisis – which has been relatively quiet for a few days now – is looking ugly again.
The most recent flareup of the crisis involves rising bond spreads, particularly between safe German government bonds and dicier Italian bonds. And some observers suggest that the divergence in yields indicates the need for another European bailout package. Calculated Risk has some interesting graphs that help illustrate the problem.
Meanwhile, Paul Krugman at the New York Times noted that the spread between Italian and German 10-year bonds is the go-to number he checks out first thing each morning, and the latest looks aren’t comforting.
“That spread spiked earlier this month, signaling the spread of the crisis beyond the small peripheral economies; at its peak a couple of weeks ago it was 3.32 per cent,” he said on his blog. “Then the new rescue plan was announced, and the spread fell to 2.47 – still very bad, but a little less catastrophic. Well, as of this morning it’s back up to 3.08. Things are falling apart.”
This might explain why the U.S. dollar index rose to 74, up 0.6, even with the rising fears of a U.S. credit rating downgrade looming in the background. The U.S. dollar also rose against the euro. Meanwhile, gold retreated slightly in afternoon trading, falling to $1,615 (U.S.) an ounce, down about $5.