European Stocks Explode Higher As Spanish Bonds Implode

Tyler Durden's picture

Sigh. Spain's IBEX gained over 3%; Italy's MIB gained over 2%; and all but the UK's FTSE equity index ended very nicely green today (all jerked higher by Spain's comments on their bad-bank and then Bernanke's cover). However, European Government Bonds (EGBs) failed dismally. Spain's 10Y spread to bunds ended the week 46bps wider and Italy 15bps wider and while some point to the short-end as evidence that all is well, Spain saw modest weakness in the 2Y today post Bernanke (though Italy rallied). The curve steepening was dramatic to say the least as the market appearsd to be increasingly assuming the ECB will monetize short-dated govvies - our own view - consider what the implied forward financing costs are given these steep curves as clearly noone trusts this as a solution and will merely subordinate the entire market.  Spain 2s10s curve is now at its steepest on record at 328bps! and this is not helping:

*SPAIN’S CATALONIA REGION CUT TO JUNK BY S&P, OUTLOOK NEGATIVE

But buy stocks...

 

Spain 10Y spreads now wider than when Draghi 'promised'...

 

leaving the Spain 2s10s curve at all-time record steeps... sustainable? consider what forward funding costs are implied by this...

 

and credit did not follow stocks higher in the late-day...

 

and maybe this correlation will re-assert... (Spanish Bond risk - red - inverted against US equities (green)

 

Chart: Bloomberg