The European sovereign debt markets are dominated by the haves and the have-nots today as risk transfer is the key phrase of the day. Away from the technicals of the CDS markets and the liquidity of the CDS indices, the critical yields on sovereign bonds are not exactly exuberant in most cases. Obviously GGBs are improving but still not dramatically and while we would expect the PIIGS to all be benefiting greatly, we note that from the exuberant opening levels, BTPs (for instance) have leaked lower in price (higher in yield) all day long. As 10Y BTPs inch back up towards 6% and EFSF bonds slide lower in price, it seems, as Peter Tchir points out below, that "it's like throwing a surprise birthday party and not inviting the person whose birthday it is".
It seems Berlusconi's 'very generous' offer of budget cuts is being totally ignored (correctly in our view) by the market - and we suspect the ECB was in buying early on to get us all going.
The EFSF yields closed at their highs so we assume the Chinese weren't jumping in yet. GGBs obviously are the best performer as most direct recipient of positive news (GGBs were trading well below the 50% takeout level) but looking across all the 5Y spreads below shows that this was not as huge a day as US equity markets would have you believe.
In running equivalent terms, we also note exactly what we expected would occur has happened in GGB basis - the basis (CDS-Cash) has moved from around +115bps last Friday to -480bps today! with 5Y GGBs trading ~2960bps over Bunds while CDS trades ~2475bps over Germany. The front-end is even more massively skewed. 5Y Greece CDS has compressed around 575bps running equivalent today.
And from Peter Tchir of TF Market Advisors:
Back to the crux of the matter. Italian 5 year bonds yields were around 5.55% most of yesterday, though they dipped to 5.47% briefly. This morning, when I should have been asleep, they touched 5.25%. They are back to almost 5.5% so actually higher yielding than their best levels of yesterday. It's like throwing a surprise birthday party and not inviting the person whose birthday it is.
Clearly there is a lot going on, but this has to be one of the key indicators of the success of the program. The 5 year government bond is a sweet spot of the market for sovereign debt, and this move is at least somewhat concerting. It was at 5.7% on the 20th, so some improvement, but it was at 5.0% on the 6th, so a big decline. It is an illiquid market. There is so much noise between CDS and bank share prices that you can't read much into the price until it settles down a bit, but it is not doing as well as you would like to see if the new programs were really going to be as successful as people want to believe.
Spain is performing much better than Italy. That is encouraging. It is much closer to its best yield of the past few days. French and German yields are increasing again, but that makes sense as they pick up the tab. I wouldn't be surprised to see an ECB rate cut to try and keep the yields down and for Germany at least, the yields are still very low 1.32% for 5 year.
As a whole we are still lacking a lot of details. Will ECB or EFSF or both be doing secondary market support going forward? What does a 50% NPV haircut really mean? What will the EFSF really look like.
We are definitely at some "moment". But is it the "Bear Stearns" Moment that led to a 6 month rally before the collapse of Lehman or is it an "AIG" Moment, that barely lasted a day before renewed selling hit the market, or is it a "March 2009" Moment where we turned the corner and never looked back?