Operation Adios Rajoy Begins

Tyler Durden's picture

As we have been discussing for a few weeks, the European markets need a risk flare for any of the oh-so-conditional firewalls, that have been heralded as cutting risk's tail, to become relevant. What is stunning is the level of disappointment that Rajoy has not requested a bailout yet (noted this morning on CNBC as the reason Europe is red today). It seems, as we pointed out Friday and yesterday, Operation Adios Rajoy is underway in the markets... Spanish bonds have pushed notably higher in yield (with the front-end leaking rather considerably), Spanish 5Y CDS are 21bps wider today, but it is the Portuguese market that we suspect is where the leverage is being applied. The Portuguese market was used as evidence of Draghi's awesomeness and while its illiquidity helped on the way down in yields, it is also hindering now - as Portugal's 10Y is now 70bps higher in yield in the last two days - notably back above an unsustainable 8% (at the same time as government revenues missed expectations - shocker). Risk flare-on.

Portuguese 10Y yields are ripping higher in the last two days...

 

We suspect the basis trade is largely responsible for this as it peaked back above -100bps and now that liquidity is flooding back out at the margin. It was a great trade - predicated on the falling probability of some OSI/PSI workaround to flummox the CDS players...

Portugal CDS-Cash spread (lower means Bonds wider/riskier than CDS)... so once again CDS traders 'saved' the European bond markets...by arbitraging the illiquidity

 

and pressure on the over-exuberant Italian (stock) market is starting to pile up...

 

Charts: Bloomberg