Yields were higher across the board a week after the formal announcement of QE2 but the move was negligible before Friday’s price action.

Credit spreads jumped for the first time since mid-October as the hangover from the QE2 run-up set in early in the week. The Markit CDS index, that tracks the cost of 5-year default protection for an index of 125 companies, has rallied to levels not seen since early 2008. Another sure sign of the Fed purposefully driving investors further out on the risk curve.

After being delayed for an hour due to technical problems, the Fed purchased $7.229 billion in Treasurys on Friday in the first operation of QE2. The announcement of Open Market Operations for the next month came in as expected at $105 billion before December 10. More specifically, the New York Fed will come to the market everyday next week to purchase between $25.5 billion and $34.5 billion in coupon Treasurys.

More Euro-mania

Ireland led the most recent charge of European Sovereign debt hysteria this week as credit and CDS spreads rocketed to all time highs. There is a lot going on in Europe right now. Here’s a very quick rundown.

The ECB settled earlier credit fears in Ireland and elsewhere buy pledging to purchase outstanding debt to prop up the market. More recently, in the face of Bernanke announcing QE2 in the states, The ECB has moved away from purchases amidst discussions with European countries over developing a program to organize orderly sovereign defaults. As you can see from the graph below reality has been setting in gradually in Irish Sovereign spreads, but came to a head this week.

The politically charged actions of the ECB are wreaking havoc on relations within the Eurozone. It’s only so long before Germany and France say “enough is enough” and let the problem countries stand alone. What the true end to situation will be is unknown, but sure to be very ugly. On one hand, countries like Ireland, Greece Spain and Portugal are relying on the ECB, the World Bank and the IMF to mask debt problems through guarantees and QE, but the problem could soon be too big for even them to manage. The case for haircuts on troubled sovereign debt is gaining steam, but still seems like a distant possibility as the Global “extend and pretend” mindset continues to prevail. The situation in Europe is so far from sustainable and continues to worsen as governments insist on kicking the can further down the road instead of dealing with their problems head on.

As of this posting there is no confirmed report of any aid coming for Ireland. The tick down in the graph above is only the result of rumor, but an announcement of aid in some form is expected over the weekend. If nothing comes, next week could get nasty.

Have a great weekend. 

Cliff J. Reynolds Jr., Investment Analyst