European Debt Crisis, The Sequel

Think back to this time last year. We were less than one month from the end of the Fed’s first round of quantitative easing (QE1) which was a $1.25t mortgage bond buying campaign. Anticipating the end of Fed support, mortgages were selling and rates were rising, but then Greece’s bailout triggered a European debt crisis that caused U.S. bonds to rally and rates plummeted to extreme record lows—here’s a diagrammed chart, a timeline, and newer chart.

But CalculatedRisk reminds us that the European debt crisis hasn’t just disappeared. See excerpt below. The question in this new phase is whether it will again cause global bond investors to flock to U.S. Treasury and mortgage bonds, thus bringing rates down again. There are many more factors to contend with this time, the most significant (but still unanswered) of which is whether U.S. inflation is a legitimate long-term concern for bondholders. If so, U.S. bonds wouldn’t as attractive an alternative as last summer.

The European financial crisis has been simmering in the background, but will probably become front page news again this month. There are several meetings schedule in March, starting tomorrow in Helsinki, and then a special eurozone debt crisis summit on March 11th.