The existence of a potential debt contango situation forced European stocks lower yesterday as investors fear that Europe’s debt crisis is still worsening. Contango occurs when the future price of a commodity is expected to be higher than the current market price.
With respect to the sale of debt, investors feel that the PIIGS economies (Portugal, Italy, Ireland, Greece, Spain) will be forced to offer even higher yields in the near future to attract buyers. For this reason, they are either avoiding these bonds, or demanding higher interest now before buying.
“The contagion is definitely spreading and spreading quite rapidly to Portugal, Spain, Ireland and Italy,†Mehernosh Engineer, a credit strategist at BNP Paribas SA in London, wrote in a report today. “The market has been in a show-me-the-money mode for well over three months and the lack of guidance is slowly and steadily sowing the seeds of a double-dip.â€
Source: Bloomberg
