The inevitable correction

We all knew that Europe's financial problems couldn't be solved quickly but needed a reminder in order to see markets impacted, so Spanish as well as Italian bond yields creeping  back up again provided the trigger. Combine that with a lackluster US jobs report and you have Treasuries back within the well worn range established months ago of 1.9-2.06%, as 10 year notes closed at 2.05% on Good Friday in an abbreviated trading session. Gold broke through key technical support levels and you have equities also in correction mode. The US economy may be in a 2-2.5% growth environment and with inflation running 2-3% that would imply 10 year Treasury rates at around 3% or higher, but you have the overwhelming fear of a return of the European sovereign debt crisis hanging over the market in the short run. A correction in equities and commodities should be expected as well since you've had extraordinarily high returns achieved in a relatively short span of time that has been mostly driven by the Federal Reserve keeping interest rates extraordinarily low through their quantitative easing program that is due to end in June. The Fed provided clear signals that no QE3 will be forthcoming unless a dramatic change in the US economic climate occurs so there is not much to look forward to in the short run and the path of least resistance for equities and commodities appears to be down. Spain's fiscal deficit is failing to meet targets established by European Union and IMF leaders and Italy has an astronomically high debt/GDP level. Historically, markets didn't seem to mind Italy's massive debt because its fiscal deficit/GDP was within reason but with the latest austerity measures, their fiscal deficit may actually get worse before it gets better. Investors seem less willing lately to fund those deficits and LTRO money appears to be running out.. The trillion Euros of 1% 3 year loans (LTROs) provided by the ECB to European banks had eased concerns about failed sovereign debt auctions as banks were now enabled to buy the debt and make some attractive carry but it appears that investors are becoming more demanding now and auctions are clearing at higher and higher yield levels. LTROs were meant to also fund the banks so they wouldn't have to access the capital markets over the next few years, not just to buy sovereign debt. Add to that the fact that German economic growth is faltering, previously thought to be the engine that might pull the other European nations out of recession, and you have a self-reinforcing situation of worsening fiscal deficits that will result in worsening debt levels. In the US, we learned a long time ago that the best way out of a heavy debt burden was to stimulate economic growth to generate higher tax revenue so austerity is liable to drive debt levels in the wrong direction.