Stocks sink, Europe in bear market even as Italian and Spanish bond yields fall

Markets plunged again on Monday. Bloomberg reports:

U.S. stocks sank the most since December 2008, while Treasuries rallied and gold surged to a record, as Standard & Poor’s reduction of the nation’s credit rating fueled concern the economic slowdown will worsen. The Dow Jones Industrial Average plunged 634.76 points as approximately $2.5 trillion was erased from global equities.

The S&P 500 Index (SPX) lost 6.7 percent to 1,119.46 at 4 p.m. in New York, its lowest level since September, as all 500 stocks fell for the first time since Bloomberg began tracking the data in 1996. The Stoxx Europe 600 Index slid 4.1 percent to extend a drop from its 2011 high to 21 percent. A surge in Treasuries, benchmarks of the nation’s $34 trillion debt market that is more than twice the value of American equities, sent the 10-year note yield down 22 basis points to 2.34 percent, the lowest since January 2009, and the two-year rate slid to a record low. The S&P GSCI commodities index lost 3.9 percent.

While the US stock market saw a bigger drop on Monday, Europe's bigger fall since its peak in February leaves it in bear market territory.

There was some good news on the European front though. From Reuters:

European Central Bank buying of Italian and Spanish debt pushed the two countries' bond yields sharply lower on Monday, while German Bunds rose sharply as investors unnerved by a U.S. ratings downgrade ditched stocks for safer assets...

Italian and Spanish yields fell by up to a full point across the curve. Ten-year Italian yields were last 5.33 percent, off session lows of 5.18 percent -- levels last seen on July 22 after the second Greek bailout was agreed -- trading 12 bps over their Spanish equivalent.

However, contagion remains a very real risk.

The cost of insuring French debt against default hit a record high of 160 bps on Monday, up 15.5 bps on the day, as the sovereign is seen as the next in line to potentially lose its triple-A rating.

French CDS rose some 55 bps since July 22 on worries the euro zone debt crisis could spread to core countries as well. Last week, the 10-year French/German government bond yield spread hit euro lifetime highs of 91 bps.