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How to Profit from EU Market Intervention into Spain and Italy Bond Markets

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The governments of Italy and Spain are breathing a sigh of relief as a bond purchasing market intervention by the European Central Bank (ECB) has pushed down yields on bonds issued by the two troubled eurozone members.

The European Central Bank's previous efforts to keep the yields of troubled eurozone members' bonds from skyrocketing was limited to the much smaller countries of Greece, Ireland and Portugal.

However, the growing concerns over the fiscal and economic stability of Spain and Italy caused investors to worry that if either of the two countries were to fall into a financial crisis that the size of their deficits would be too big for the European Union to be able to bail them out like it did Greece, Ireland and Portugal.

Yields of the two countries' bonds began climbing higher last week and they were expected increase even further after Standard & Poor's downgraded its rating of American debt on Friday of last week.

Italian Prime Minister Silvio Berlusconi helped to avert disaster by promising on Friday night to speed up financial reforms and to balance the Italian budget by 2013, a year earlier than was previously planned.

It was a bold move by Berlusconi who has tried to stay out of the limelight recently because he is dealing with legal charges against him involving underage prostitution and corruption.

The European Central Bank seemed to approve of Berlusconi's plans to speed up reform and deficit reduction, and decided to intervene in the bond market in support of the governments of Spain and Italy.

The European Central Bank hopes that its show of support will scare off the bears and be enough to keep the borrowing costs of Italy and Spain from climbing higher.

So far the European Central Bank's market intervention is working, as the of yields Italian and Spanish bonds have dropped.

In a strange twist, Spain and Italy may have actually benefited from Standard & Poor's downgrade of American debt because it has fueled fears that Western countries will fall into recession as they cut spending to fix their deficit problems.

Since it seems like the United States and the European Union are serious about reducing their budget deficits, bonds are becoming much more attractive than stocks in the face of a looming recession.

Evidence of this was seen as stock markets from Asia to Europe tanked while the cost of borrowing for eurozone countries was improving.

There were echoes of Greece as members of the Italian opposition accused Prime Minister Berlusconi of selling out Italy in favor of the European Central Bank and other international financial institutions.

However, it's likely that the Italian opposition will do as the Greek opposition did and allow the reforms to continue because of the very real risk that Italy could end up defaulting if it doesn't balance its budget soon.

Investors who feel that the intervention of the European Central Bank has restored faith in the European Union's commitment to preventing any eurozone countries from defaulting might want to take a look at the CurrencyShares Euro Trust (NYSE: FXE) ETF.

The move by the ECB has already achieved the desired result and traders who are thinking about betting against the euro may think twice now that they know that European Central Bank is committed to defending member states, no matter their size.

Investors who feel that there will be a continued flow of funds out of stocks and into bonds might want to consider the ProShares UltraShort S&P500 (NYSE: SDS), the ProShares UltraShort MSCI Europe (NYSE: EPV) or the ProShares Short FTSE China 25 (NYSE: YXI).

If stock prices around the world continue to tumble, these ETFs are alternatives to investing in a turbulent bond market.

The Swiss Franc is currently the safe haven currency of many investors because there is still so much uncertainty regarding the finances of the United States and eurozone governments.

The CurrencyShares Swiss Franc Trust (NYSE: FXF) is an easy way for investors to move part of their portfolios into a currency backed by a government that prides itself on fiscal responsibility.

 

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