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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:


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


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Fri, 08/31/2012 - 12:06 | Link to Comment A Man without Q...
A Man without Qualities's picture

big sell-off in the FTSE into the close, but cannot see any specific news...

Fri, 08/31/2012 - 12:07 | Link to Comment fireangelmaverick
fireangelmaverick's picture

The damage caused by Bernanke is Irreversible.....kinda like the Euro.....Wall Street Journal Sep 2014.

Fri, 08/31/2012 - 12:21 | Link to Comment camaro68ss
camaro68ss's picture

doomsday is coming bitchez!!!!!

Fri, 08/31/2012 - 12:38 | Link to Comment THX 1178
THX 1178's picture

Cut to JUNK; outlook negative? Who cares? An F is an F. 

Fri, 08/31/2012 - 12:14 | Link to Comment gkumar
gkumar's picture

Catalonia cut to Junk. Thats the reason european indices are down now. For a change bloomberg is faster than ZH

Fri, 08/31/2012 - 12:19 | Link to Comment trebuchet
trebuchet's picture

Asset reallocation out of spain as spanish generic moves closer to junk. 

ECB Subordination issue on short end if that is the intervention.... more asset reallocation..

+ bond vigilantes short covering?? 


i wish i understood bond markets more, would be grategufl if someone suggested any tips/links  to a guide for muppets?

Fri, 08/31/2012 - 12:44 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

Anything you might read would be obsolete in the New Normal.

All you need to know for now is bonds are where terrified money goes.  US T's will soak it all up from everywhere in the world.

No, it doesn't matter if US fundamentals are weak.  US T's are defended by the US military and that's all terrified money cares about.

They will drive rates negative soon.  Oil's scarcity is crushing all activity, including economic activity, and that is inevitably deflationary.  

If you're in now, you profit.

Fri, 08/31/2012 - 12:21 | Link to Comment malikai
malikai's picture

Yup. Leave it to S&P to be ahead of the curve, as never.

I believe all of Spain's paper has been considered "junk" around here for quite some time.

Fri, 08/31/2012 - 12:29 | Link to Comment Rainman
Rainman's picture

Catalonia sits on about one third of the country's debt. I just knew those marble floors in the Barcelona airport were over the top.

Fri, 08/31/2012 - 13:05 | Link to Comment dcb
dcb's picture

just do your chart weekly,

Fri, 08/31/2012 - 12:06 | Link to Comment Capitalist
Capitalist's picture

Pfft crowded trades. Put a French OATS 2s10s steepener on.... PROFIT!

Fri, 08/31/2012 - 12:33 | Link to Comment omi
omi's picture

How do you do spread trades on credit?

Fri, 08/31/2012 - 12:06 | Link to Comment pods
pods's picture

Like a drowning man trying to avoid taking in the first breath of water.

After that things will settle down.


Fri, 08/31/2012 - 12:07 | Link to Comment Meesohaawnee
Meesohaawnee's picture


Fri, 08/31/2012 - 12:07 | Link to Comment khakuda
khakuda's picture

Bad banks, money printing, ZIRP, blah, blah.

Not one of these things EVER addresses the underlying problem that all these countries continue to INCREASE debt and until then, the problem will never go away.

Fri, 08/31/2012 - 13:12 | Link to Comment Nobody For President
Nobody For President's picture

Hey, it worked for a long time. It is just that guberments didn't get the memo those times have ended.


Fri, 08/31/2012 - 12:08 | Link to Comment nathan1234
nathan1234's picture

Ah it's pension money- someone else's money- Buy BUY BUYYYYYYYY

Fri, 08/31/2012 - 12:09 | Link to Comment Jason T
Jason T's picture

seems yeild is backing off and dow is backing off too..




Fri, 08/31/2012 - 12:46 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

And that is that, to say nothing of the fact that his replacement would be even more of a defend-German-money hawk.

Fri, 08/31/2012 - 12:13 | Link to Comment LawsofPhysics
LawsofPhysics's picture

How does this make any fucking sense?  Bond vigilantes finally had enough of spain?

Fri, 08/31/2012 - 12:15 | Link to Comment tocointhephrase
tocointhephrase's picture

Silver, i'm pleased to see you too

Fri, 08/31/2012 - 12:18 | Link to Comment youngman
youngman's picture

The whole investing world has gone from Business´s and what they make and sell.....profit and what Central Bank is going to print first and how much....sad really..the stocks or more like the ETF´s are just a surfboard to ride the wave..

Fri, 08/31/2012 - 12:19 | Link to Comment Burr's 2nd Shot
Burr's 2nd Shot's picture

Obviously, one cannot eat Spanish debt. Equity Paella, however, is delicious, especially when served with a nice Rioja.

Fri, 08/31/2012 - 12:26 | Link to Comment BeetleBailey
BeetleBailey's picture


Fri, 08/31/2012 - 12:30 | Link to Comment omi
omi's picture

Well that actually makes sense.

I don't think so much money has been lost as lending to government. When you're sure that the bonds won't be worth much, you'd rather buy stocks that are on deep discount. At least there is some chance of making your money back.

edit: Do you seriously think that just because governments fail and corresponding bonds go to zero, people would not need services that are available? Most companies will be around regardless of currency or who's in power, some will shut down, sure, but there's a base level of demand for all services no matter how bad the economic situation is.

Fri, 08/31/2012 - 12:44 | Link to Comment silver4me
silver4me's picture

"Most companies will be around regardless of currency or who's in power, some will shut down, sure, but there's a base level of demand for all services no matter how bad the economic situation is."


The average person will get screwed no matter what. Gold in your hand is safest bet.

Fri, 08/31/2012 - 13:04 | Link to Comment omi
omi's picture

Screw gold, practice shows that having access to distribution (not even production) of goods is far more important. Seen that in Russia, Belarus and Ukraine.


But I guess this is a gold bugs hangout, so it's like pissing at the wind.

Fri, 08/31/2012 - 12:42 | Link to Comment mammoth mo
mammoth mo's picture


What we have here is nervous twitching.  The signals being given off do not add up.  Stocks are good and Bonds are bad.  But it's not really that simple:

Bonds which should be safe and less risky than stocks (and for that matter pay a lower return) are now unsafe in Spain, more or as risky as stocks in Spain (and for that matter if they are actually going to pay - paying as high or a higher return than stocks).

Such is the real problem.  The Central Banks, in an effort to get everyone to buy the Market across the world, have now created high yielding bonds in unstable economies.

These high yielding bonds represent alternative equity gambling venues.  No longer are bonds in these countries safe and secure.  They are now unsafe with a potential for a nice payoff.  All you need is for the Central Bank to bail you out and like magic you have made a profit.

So when the Spanish Bond dips below 6% someone buys in.  As the Bond price rises due to the fact that the country is bankrupt.  Profit.  Sell those bonds back to the Central Bank (no one else is buying).

So you have the correlation of high rising stock markets and high rising bonds.  The stock market is rising because central banks are pumping in liquidity on any old POS.   The bond market is rising because everyone knows its a POS in the market and they know its going to fall.

Regardless the Central Bank now has to bail out both sides - the equity market and the bond market.  It's a gamblers paradise in Spain and Italy right now.  Buy either stocks or bonds and know you will get bailed out.


Fri, 08/31/2012 - 12:48 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

You can't guess the whims of government intervention.

All you can do is know that terrified money is fleeing to US Ts.  This will get worse and worse and worse because the only US fundamental that counts is the US military will defend those documents.

Negative rates are eventually likely.

Fri, 08/31/2012 - 12:57 | Link to Comment mammoth mo
mammoth mo's picture

Agreed -

All those not gambling will place their money in what they percieve as safe and secure treasuries.


Fri, 08/31/2012 - 12:52 | Link to Comment lasvegaspersona
lasvegaspersona's picture

seems one small failure to get bailed out (enough) and those 'profits' vanish.....picking up pennies in front of the steamroller?

the little guy is probably best served by quietly waiting in gold and adequate cash

Fri, 08/31/2012 - 13:04 | Link to Comment dcb
dcb's picture

well we hit my udn target line today, I has posted about this getting close top target but not reaching. we shall see, But I sold a good portion of the position.

I see today as silly aglo hunting for buy orders, we got to a point where you'd switch, and then dropped. But of course there is nothing wrong with the capitial markets according to the powers that be

Fri, 08/31/2012 - 13:44 | Link to Comment dcb
dcb's picture

anyone understand why crude is acting like it is today? Short squeeze?

I am really confused heere, except algo's just pushing things?

Fri, 08/31/2012 - 13:57 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

Quiet report out of Russian oil output having problems.

Fri, 08/31/2012 - 21:37 | Link to Comment IMA5U
IMA5U's picture

it must suck to be a perma bear

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