We have seen a 4 month rally in euro-region debt with yields on Italian and Spanish bonds seeing their biggest one-day jump in almost a year last week. The sell-off in European sovereign debt began in Greece and has spread following the same lines of contagion that emerged 2010-2011. Bids have simply evaporated and prices have tumbled. The short-term traders were counting on the ECM supporting bonds just as the Japanese relied upon their central bank to support the Nikkei back when. The European derivatives have seen a mad rush to protect against losses.
Despite the fact that borrowing costs fell to near record lows of the typical bullishness in government that appears endless, the sudden price swing shows these markets are by no means stable. When fear strikes, it is going to be a blood-bath. The assumption that the European Central Bank would support the market is seriously unfounded. There is only one exit door here and this is perhaps the greatest risk we have seen in 200 years. Liquidity is becoming a very fleeting thing and that makes investing in European sovereign debt extremely risky.