Equities continued their choppy overlapping rally today on news of more liquidity support from the ECB and statements from German Chancellor Angela Merkel and French president Nicholas Sarkozy that Greece will Remain in Currency Union.

Bloomberg reports German Bunds Decline as ECB Provides Dollars to Banks; Greek Bonds Surge

German two-year notes slid for a fourth day as the European Central Bank said it will lend dollars to euro-region banks to ensure they have enough of the U.S. currency, damping demand for safer assets.

Ten-year bund yields climbed above 2 percent for the first time since Sept. 5 as stocks gained after French President Nicolas Sarkozy and German Chancellor Angela Merkel said yesterday they’re “convinced” Greece will remain in the currency union. Greek bonds surged as investors trimmed bets the nation will default. Spain’s 10-year yields approached a one- month high after the country sold 3.95 billion euros ($5.4 billion) of debt.

The ECB said it will conduct three U.S. dollar liquidity- providing operations in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank. European stocks and the euro rallied. It will offer the loans on Oct. 12, Nov. 9 and Dec. 7.

Greek Bonds Surge?

The Bloomberg headline reads “Greek Bonds Surge”.

Did they really? No, not really, at least in any meaningful perspective if one bothers to look closer.

One-Year Greek Bond Yield

That may be a surge, but all it represents is a possible delay in bankruptcy, not that bankruptcy will be avoided.

Italy 10-Year Bond Yield

No surge where it really matters, that’s for sure.

Meanwhile the gold-dollar reverse correlation play is back in vogue today, with gold down $41 and the Euro hitting a high of 1.39.

Band-Aids and Rubber-Bands

That the ECB, FED, Bank of Japan, and Swiss National bank have to provide liquidity to calm the markets is hardly calming news, yet the market continues to react well to band-aid and rubber-band measures … for now.

It won’t last because nothing has been solved and attempts to revive the Eurobond idea is Dead-on-Arrival.

Either Merkel and Sarkozy are attempting to buy time, hoping beyond hope to preserve their failing legacies, or are delusional.

I suggest a combination of the three.

Mike “Mish” Shedlock
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