European bond traders

If you look at the crisis in Europe, the key questions to ask are clear: Will this crisis continue to spread? And will the United States get singed by the fallout?

In both cases, the answer is a very clear "Yes."

Whereas traders once were content to play around the edges by trashing Greece, Ireland and Portugal, now they're going for Europe's jugular vein. What I mean is that traders now are dumping the debt associated with so-called "core" European Union (EU) nations.

French and Austrian bonds, for example, sank to near record lows Tuesday, as yield premiums over German debt rose to 192 basis points and 184 basis points respectively according to Bloomberg.

Yields and prices run in opposite directions. If yields are rising, that means prices are falling and vice versa.

At the same time, Italian yields again sliced through 7%, the level at which debt is regarded as unsustainable. That's the second time in a week that's happened.

Meanwhile, the Spanish premium over German debt hit 482 points, which is above the 450 point spread at which both Ireland and Portuguese banks were forced into bailout status.

As measured by a combination of credit default swaps, correlation, and systemic risk, things are now worse than they were in 2008 at the depths of the financial crisis.

The way I see it, the EU debt market has become a two-way street, much the way our financial markets have become addicted to U.S. Federal Reserve funds. If the European Central Bank (ECB) is buying debt as part of a bailout, the markets rally. If the ECB is not, the markets fall.

There are no real EU debt buyers.

There are four reasons why this matters to us: