The signing of the US debt ceiling by the POTUS, moved the spotlight from the US to the reality of what is happening in Italy. A nation with a pile of debt that is to big to be rescued, has realistically been been locked out of the markets this week. The fear of contagion in Greece has slopped over into Spain & Italy this week.

The problem is we have not stopped the contagion that is putting pressure on Italy and Spain,” said a senior European finance official involved in the rescue programs, who was not authorized to speak publicly. “We would be confronted with enormous problems if things got worse.

The cost of issuing new public debt or rolling over current debt has risen significantly in the Italian and Spanish bond pits. On Tuesday (today) it hit a new Euro Era high. This has the financial ministers already looking at Italy needing access to the Euro Stabilization funds. If they don’t get access to liquidity in a matter of months, we could start to see signs of a final solution in Europe.

There are two types of players in the market, those who move out of fear and those who move out of greed,” said the senior European finance official. “And right now, we are seeing all of them move in the same direction.

Bloomberg has an article with some interesting quotes, about the changes underway in the Bond markets.

This has all the features of a self-fulfilling crisis,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Plc in London. “The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.”

“Anything materially above that risks an acceleration like we saw for Greece, Ireland and Portugal,” he said. “The political willingness to backstop the European Union is now what the market needs.

The view is shifting in the banking sectors of Europe. The fear is rising as the reality that the system does not have the proper tools to deal with this crisis becoming  obvious to the masses.

Suddenly, Italy joined the other peripherals,” said Justin Knight, a European rate strategist at UBS AG in London. “Investors are, in general, overweight Italy versus other peripheral markets, and it’s going to be a difficult position to unwind.

The news or rumors of news in Europe, in my opinion was the primary driver of fear in the US Treasury markets, as buyers show up in size.