In a previous blog, I suggested that the pricing of sovereign debt did not accurately reflect the implications of Too Big to Fail. (
Click here for blog) If my logic is correct, the appropriate investment strategy is to buy sovereign debt of Portugal, Italy, Ireland, Greece and Spain since they overstate the default risk, and short the sovereign debt of the countries that would likely have to bail them out: Germany, France, Sweden, Denmark and the Netherlands to be sure, England and the U.S. likely, Canada, Australia and New Zealand perhaps.
A pricing correction along the lines I suggested would increase the price of the PIIGS' debt and reduce the price of the other major nations. The bonds in play would be the 10-year maturities. T-bill prices aren't very sensitive to interest rate changes due to their short duration. 30-year bonds just aren't liquid enough.
Some 10-year bond yields courtesy of the Bloomberg app on my iPhone:
Tomorrow we look at the effect of these changes on banks' balance sheets.
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