As both Italian and Spanish bond spreads continue slowly creeping wider toward the half a century territory, we are reminded once again that once both countries pass 450 bps, LCH will automatically hike collateral triggers for both countries, in essence initiating another waterfall effect whereby less cash is released upon repo, requiring more bonds to be pledged, which in turn means other assets have to be sold off to make up for the shortfall, which in turn leads to a sell off of the underlying financial institution (recall that banks in Europe buy their nation's sovereign debt and immediately pledge it back via various repo mechanisms) and so on. What this practically means is that the bond vigilantes now have a far more achievable task in terms of endgoals when it comes to punishing the offending debt, in this case Italy and Spain. Expect a prompt move to this appropriate level as debt holders start panicking what an extra margin demand will mean for them, and in turn try to lock up cash at current repo levels.
As a reminder, from May 5, 2011 Dow Jones:
LONDON (Dow Jones)--Clearing house LCH.Clearnet said Thursday it is raising the extra margin it requires for positions in Irish government bonds cleared through its RepoClear service.
Back in October, the clearing house said it would generally consider a spread of 450 basis points over the 10-year AAA benchmark to be indicative of additional sovereign risk, meaning it may materially increase the margin required for positions in that issuer."
Translation: price, or as the case may be, yield, target.