Tuesday, 12 July 2011

Convergence/Divergence of Greek and German bonds

So what’s the takeaway? Basically investors front-ran the inclusion of Greece into the eurozone. The trade worked. A lot of people made a lot of money as the spreads came in to Germany as expected. And on the face of it, some of the statistics such as Greek inflation numbers seemed to back up the story that the Greek economic/technocratic establishment was starting to behave in a way that would be more favorable to bond investors. (Although, as we know now, it would have been a good idea to view those stats with some skepticism.)

But in giving a quick glance to the coverage of the great convergence, it’s tough to find any indication that anybody really understood what what “convergence” really was and how it explained bond yields that low. In short, it was a trade that worked, until recently, when it stopped working.


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