Sovereign Bond Yields - Haves And Have-Nots

Tyler Durden's picture

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.

Charts: Bloomberg

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?

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Ancona's picture

Austerity, it's the new chic. Broke is now cool.

trav7777's picture

people will have to find meaning beyond possessions?  WTF is the world coming to?  Personality will matter?

DormRoom's picture

Medium term EZ is doomed.  The North-South suffer from a variant of Dutch Disease.  Debt has not been eliminated, but tranferred to the core.   If the PIIGs get stronger, it's likely the core will deteriorate.  So instead of a PIIGs crisis, youi'll see a core crisis in the years ahead.  PIIGs or Germany must exit.  Or there must be a fiscal union, unless the EZ implodes in the years ahead. 

The financial timebomb was only extended by a few years, and it is still ticking.


And without an effective CDS hedge, I would assume core yields to continue rising until doomsday. dudh. dun dunh.

depression's picture

Risk ON

Bill Gross just cannot catch a break this year.

pendragon's picture

at what point do details become relevant to equity investors? we still don't know who's picking up the tab for this joke. presumably as soon as we do france will be downgraded.

LawsofPhysics's picture

Or is it 1924, or is it 1929?  With the moral hazard now on steriods and everyone being told essentially there is no risk and no way to hedge (aside from physical) we are indeed trading without a net.    fucking awesome.

PulauHantu29's picture

I'm glad they worked it out. I hate to see grown people fight.

vegas's picture

Seriously, who the hell would lend money to the likes of Silvio B. & the clownish Italian Government?

It's a black hole, where you stand no chance of getting your money back?

I'd rather loan-shark lend to Gypsies who bet on EPL soccer.

paulie's picture

Speculators who want to make a lot of money out of the interests.
Surprisingly Italy has the wealth to repay its debt that's why it is being attacked by speculators and that is why Spain, US and Japan are not.



CClarity's picture

But but but . . . the ISDA says there is no credit event so all is well.  Until everyone figures out that the CDS hedges are useless but haven't "gone away".

GeneMarchbanks's picture

'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?'

None of those. It is the moment you realize concentrated risk is now such a force that you might as well preach it as gospel, until one day it proves false...

Zola's picture

Hey Tyler, the great BIGGS is on again railing against austerity...

Cassandra Syndrome's picture

Dollar Index about to breach 75

GeneMarchbanks's picture

Floor @ 74. Freefall from there would indicate the faeces & turbo fan situation.

cowdiddly's picture

I can't believe no one is talking about this. below 74 be dragons. YIKES

Tsar Pointless's picture

Been watching DX-Y all morning.

Below 75 now, down 1.67% on the day.

HelluvaEngineer's picture

Effectively taking QE3 off the table.

GeneMarchbanks's picture

Or Qe3 launched already and we missed the starting gun. Nevermind, it would show up in the data... [sigh...] Anybody else getting really paranoid?

cowdiddly's picture

Me, all cash(and that sucks) this whole crap looks ready to revert and implode back to reality. Im tired of being the sucker short sheep that gets sheared can't bring myself to try it again so I guess Ill just get some popcorn. Yes Im a chicken shit but I will live to play another day.

SheepDog-One's picture

Thats why I think this range is about at its upper level. All aboard for the equity bulls, lop off their horns again, then try to shear the shorts again next turn. Its all green money both ways.

EL INDIO's picture

Shit man, I thought it was bottoming yesterday then we get this whopping jump in the Euro !

But you know what, I’m not disposing of my dollars yet not until Bernanke starts printing again.

You hear that Benny (and whoever is above you), you want the dollar to be weak without doing your job ?

Fuck you, you can’t squeeze me I’m not short the Euro, I don’t participate in your shit markets, I only got cash and Gold,

So again fuuuuuck you.

Tsar Pointless's picture

I don't think many people remember the old adage:

The market can remain irrational longer than you can stay solvent.

It's not inconceivable, that the S&P 500 gets back to the 1400 area before dropping.

In other words, we're in 5 of B up of the A-B-C Supercycle correction that began in March 2009.

There's another old adage that comes to mind considering the above:

What goes up...

jcaz's picture

So Spain is OK, until Italy trips... Then watch Spanish bonds trip.... That's how contagion works.

It will end when someone figures out how to cashflow-positive out of this.... Oh wait, US GDP is up, we're gonna consumer spend our way out of this- that's the answer-  People of Greece, go out and load up on Nintendos!

qussl3's picture

What do we do when the EFSF yields hit 6.

Also, since im pretty sure the EFSF doesnt exist yet, why the hell does it have a yield?

s2man's picture


Europe’s debt plan offers no bazooka


Where have we heard that before?

RobotTrader's picture

Anybody who loaded big at the lows "Made Their Year" in 3 weeks.

They can pretty much cash out and retire for the rest of the year, and maybe even next year.

50% gain in Morgan Stanley alone.

SkySavage's picture

The three logical moments:

To see but not "see";

To see as well as "see";

And to not see, while the market "sees".

Dumpster Fire's picture

My grandfather always said be a mortician or a barber.  Haircuts and death are both bullish apparently.

Archimedes's picture

Just watched Jeff Macke say this rally is going higher and that Europe bought themselves a couple of years! Wow! Not so sure about that! And I like Macke!

Tsar Pointless's picture

See my comment above re. markets and irrationality.

Not unrealistic to see S&P go up to 1400-ish in the next month or so.

Not at all.

Archimedes's picture

I agree the market is going higher I just doubt they bought a few years!

Tsar Pointless's picture

I think we all also doubted that the S&P would double from March 2009's low to this year's high.

We were wrong then.

Anything is possible in this world. Those who believe otherwise are delusional.

walküre's picture

Merkel, Sarkozy and Trichet knocked on the banks doors at 4am and made an offer "they could not refuse".

Either you accept the 50% haircut or we will force you to accept it.

I see where this is going. Good thing I'm not a lender and didn't bother buying anyone's sovereign debt.

That's how this game is going to get rigged going forward.

If you're not yet on an island or have secured a safe and remote hideout, your chances are running out. Governments will stop at nothing to keep their Ponzi going. Today they're forcing the banks to take haircuts, tomorrow they will force the rest of the population to swallow massive cuts in the name of "austerity". While I agree that the banks need to be trimmed back, it does set an uncomfortable precedent.

Now they can leverage the EFSF multiple times. Call me old fashioned, but when you start leveraging debt vehicles like that the currency will get diluted multiple times as well. Gold will do very well no matter how the paper price is manipulated to save an illusion of "that almighty Dollar".

My cattle is looking good this morning. Food prices will go through the roof and I'm willing to bet the farm on that.

Zola's picture

Relax, it is clear the PTB want a green day after they bailoutfest. This is to get latecomers like Robo to buy the high and the hype that all is well and the world has been saved by Merkozy again. In reality this may be the start of the haircuts on the bonds and while that is a positive step , the show is not over until everyone has left the theater...

DavidC's picture

"The EFSF yields closed at their highs so we assume the Chinese weren't jumping in yet".

Hmmm, would you?