Sovereign Credit Commentary

Uncharacteristic decisiveness from the E.U. took the markets by surprise this week and helped sovereigns withstand the risk aversion created by the tragic events in Japan.

The eurozone’s periphery hasn’t been a major cause of risk aversion for a while. But that has changed this week, with sovereigns once again triggering unease in the markets.

How often do black swan events occur? If events in the Middle East and North Africa are any indication, the answer is fairly regularly.

After the emphatic rally of last week, the sovereign credit markets came back down to earth this week as they were reminded that the eurozone debt crisis is far from resolved.

Three themes were occupying the sovereign markets last week: the improving economic climate in the developed world, the fate of the European Financial Stability Facility and geopolitical turmoil in the Middle East.

The sovereign credit markets had rallied sharply in the run-up to the Eurogroup/Ecofin meetings on January 18-19. Rhetoric from various high-ranking European officials, including European Commission President José Manuel Barroso, had given rise to optimism that the E.U. would abandon its caution and take a more radical approach to the sovereign debt crisis.

Portugal's bond auction on Wednesday was posited as a potential tipping point.

As liquidity dissolves and the inclement weather reduces trading activity even further, perhaps it is timely to look at the major themes that will be germane in the credit markets in 2011.

The sovereign credit default swaps market has been notable for its relative docility in recent weeks.

Sovereign credit default swaps spreads were little changed this week as corporate earnings and the now-ubiquitous quantitative easing expectations dominated the market discourse.

European sovereigns took something of a back seat this week as the actions of the U.S. Federal Reserve took precedence.

European credit spreads rallied last week as the picture became clearer on the important bank stress tests.