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BY THE THIRD week of February the mood among participants in the troubled European government bond markets had shifted once again. From depression at the end of 2010, when large bedrock investors were exiting the market, euphoria had broken out in the first weeks of 2011 at strong receptions for auctions from Portugal and syndicated deals from Spain and the EFSF, with its now legendary €44.5 billion order book for an inaugural €5 billion five-year issue. "Few people came into the new year long relative to government bond benchmarks. Real money was flat. Dealers were cautious. Leveraged money had put on spread wideners," says Carl Norrey, head of European rates securities at JPMorgan. "So when all those deals went well, it caught the market a little short." Hedge funds started buying again in January and the rally drew back some real-money investors, hopeful that political commitment to the single currency was translating into renewed determination to prevent sovereign defaults.
