The Government Bond Crisis

Moody's warns that there is a significant probability that US bonds will be downgraded.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens. . . .

Meanwhile Europe is a mess and people don't seem to realize that all this government guarantees only means that countries will spend more money and get in even worse off. From the UK Telegraph:

The three-month euribor/OIS spread, the fear gauge of credit markets, reached the highest level in two years today, jumping 7 basis points to 40 in wild trading. . . . The credit stress was triggered by fresh mayhem in the southern European bond markets and ominously in parts of the eurozone's soft core as well, including Belgium. Spanish yields pushed further into the danger zone to 6.42pc. Italian debt reached a post-EMU high of 6.22pc before falling back slightly on reports of Chinese buying. . . .

Another way of measuring the problem:

On financial markets, the benchmark spread between 10-year Spanish bonds and German Bunds rose to euro lifetime highs above 400 basis points before falling back to around 383 bps. . . .

The Euro Interbank Offered Rate (Euribor) is a daily reference rate based on the averaged interest rates at which banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market).

An overnight indexed swap (OIS) is an interest rate swap where the periodic floating rate of the swap is equal to the geometric average of an overnight index (i.e., a published interest rate) over every day of the payment period.