Equity futures are ripping tonight primarily on a pair of rumors regarding Italy. The first rumor is the IMF would buy Italian debt, now denied but the equity markets could care less.

No sooner than one ridiculous rumor goes up in flames than does another ridiculous rumor spring up in its place.

Germany Allegedly Mulls Five-Nation “Elite Bonds”

Reuters reports Germany mulls “elite bonds” with 5 nations

The German government is considering the possibility of issuing joint bonds with five fellow triple A euro zone countries that are being referred to as “elite bonds” or “AAA bonds,” newspaper Die Welt reported on Monday.

Chancellor Angela Merkel and her center-right government have repeated ruled out collectivizing debt and the introduction of common euro zone bonds.

The conservative daily cited “high European Union diplomats” involved in fighting the sovereign debt crisis saying the Berlin government was nevertheless considering issuing bonds jointly with France, Finland, Netherlands, Luxembourg and Austria.

The joint bonds could be used not only to finance borrowing for those six countries but also could be used to raise funds under strict conditions for countries such as Italy and Spain, the newspaper reported.

The goal would be to stabilize the situation in the AAA countries as well as “building a credible firewall to calm the financial markets,” Die Welt said. The interest rate for the bonds should be somewhere between 2 and 2.5 percent — or only slightly above the level for German government bonds.

The newspaper said the euro zone countries without AAA ratings should not be included initially.

Far be it from me to rule out complete stupidity from any politician at any level, but this story does not remotely smack of the truth.

I have no doubt some low or mid-level German bureaucrat might concoct such an idea but it makes no sense that Angela Merkel would go along with it.

Notice the report cited “high European Union diplomats”, not Merkel and not even German officials.

Even if Merkel was willing to go along with this nonsense, the German Supreme Court wouldn’t.

Dead on Arrival

This idea is dead on arrival no matter what the equity market thinks.

Check out the action in bonds.

Italy 10-Year Government Bonds

Italy 2-Year Government Bonds

Spain 10-Year Government Bonds

Spain 2-Year Government Bonds

Italian debt yields are modestly lower but only after the two-year bond yield soared to a new high of 8.12%. Spain yields are essentially flat.

If there was any reason to believe “elite bonds” would help Italy, or the IMF would help Italy, then 2- and 10-year yields would not be above 7%, and the 2-year yield certainly would not have soared to a new high above 8%.

Anything can happen in the next few hours I suppose, but equity markets are responding to something the bond market does not see, most likely pure nonsense.

Mike “Mish” Shedlock
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