A Long-Term View Of Spanish Bonds
Just over three months ago, George Soros said the Eurozone has three months to come up with a master plan or else face disintegration. Two months into this countdown, Spanish bonds at both the long and short ends soared to record wide levels, approaching the predicted "game over" state as they nearly inverted, only to see the world's most powerful jawboning intervention by the ECB commence in late July when Draghi delivered his famous "believe me" speech. As of today, Spanish 2 and 10 years bonds have retraced a lot of the priced in doom, with the short end collapsing by a record 350 bps, leading to the steepness on the Spanish bond curve to hit unseen historical levels. However, as the chart below shows, this is not the first, nor even second time that the Spanish bond curve has reacted violently to promises (and even actions - something we have yet to see from the ECB for all its endless talk) that all shall be well, coupled with further promises that this time it's different. It isn't. But enjoy the euphoria while it lasts.
Finally, as pertains to central banks, the market now appears to have shift the paradigm from one of "sell the news" to "sell the action" - and it appears that both Draghi and Bernanke are aware of this, and are hoping to avoid having to intervene as long as possible. Alas, with Spain's cash level dwindling, and US bank reserves in dire need of repletion in order to send stocks higher on outright nominal, and not levered buying, the time for mere talk is ending.