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The Spain Curve Inversion In All Its Gravitational Glory

Tyler Durden's picture




 

UPDATE: *ITALIAN TWO-YR NOTE YIELD RISES ABOVE 5%, 1ST TIME SINCE JAN 11

While every wannabe bond-trader and macro-strategist can quote 10Y Spanish yields, and maybe even knows what the front-end of the Spanish yield curve is doing (and why), there are three very significant events occurring in the Spanish sovereign credit market. First is the inversion of the 5s10s curve (5Y yields were above 10Y yields at the open today); second is the velocity with which 2s10s and 5s10s have plunged suggesting a total collapse in confidence of short-term sustainability; and perhaps most critically, third is the record wide spread between the bond's spread and the CDS (the so-called 'basis') which suggests market participants have regime-shifted Spain into imminent PSI territory (a la Greece and Portugal) as opposed to 'still rescuable' a la Italy for now. As we pointed out earlier, there is little that can be done (or is willing to be done) in the short-term, and the inevitability of a full-scale TROIKA program request is increasingly priced into credit markets (though its implicatios are not in equities of course).

 

Spanish 5s10s Inverted earlier - is stable now at single-digits...

 

but 5s10s have plunged dramatically in the last few days...

 

as has the more critical 2s10s...

 

but it is the CDS-Cash basis for Spain has dropped to record lows (this means bonds trade at their cheapest - widest spread - relative to the supposedly fungible CDS market ever)...

 

This is key. The point is that basis traders (who buy the 'cheap' bond against buying CDS protection) are happy to scalp for 50-100bps here and there on liquidity dislocations BUT once the sovereign becomes 'likely' to enter some kind of PSI - during which we already know the powers-that-be will do all they can to avoid triggering CDS for some mysterious reason - then there is too much event risk for arbitrageurs to save the bond. Just as we have said before - the only natural buyer of these Spanish bonds was the arbitrageurs and now they are lost, it is little wonder that with the Spanish banks unable to find any cash to fnd their own buying, Spain looks a lot like its kissing-cousin Portugal...

Portugal's CDS-Cash basis flipped regimes and has stuck there since the bailout requests began...

 

 

So in summary: Spain has lost the confidence of even short-dated traders; it would appear that even the 'Sarkozy' carry trade is not acceptable anymore as inversions occur; and now Spain has lost the arbitrageurs - signaling expectations that a fill TROIKA program is inevitable with its asscoated 'stigma' and PSI.

 

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Tue, 07/24/2012 - 10:31 | 2645357 GetZeeGold
GetZeeGold's picture

 

 

That was fun!

 

Can we do it again?

 

Tue, 07/24/2012 - 10:46 | 2645403 HoofHearted
HoofHearted's picture

In French the word is merde, and in German it is scheiss. My guess is that the people in the know in those two countries are using those words a whole lot.

Moody's finally following Sean Egan on Germany. It's about to get real, bitchez. And that is real bad for Euroland. Damn, I still have about 5 euros of coins left from my last trip. Oh well. They'll be worthless soon...should have taken one more coffee before leaving Charles DeGaulle.

King dollar may have a little while longer to survive, but I prefer the shiny physical stuff. With prices so depressed (and yes, likely to go a little lower) it may be time for the ZH community to back up the truck. Or at least to start warming the truck up.

Tue, 07/24/2012 - 10:50 | 2645424 Nussi34
Nussi34's picture

At least you got out of crappy CDG airport without a strike!

Tue, 07/24/2012 - 10:47 | 2645405 Ethics Gradient
Ethics Gradient's picture

I'll just leave this here....

Fratelli d'Italia,
l'Italia s'è desta,
dell'elmo di Scipio
s'è cinta la testa.
Dov'è la Vittoria?
Le porga la chioma,
ché schiava di Roma
Iddio la creò.

Tue, 07/24/2012 - 11:28 | 2645548 DogSlime
DogSlime's picture

"Yes, we can."

 :)

Tue, 07/24/2012 - 10:37 | 2645369 zero19451945
zero19451945's picture

Oh No!!

Now the FTSE is down!!!!

RobotTrader, what have you done to me?????

Tue, 07/24/2012 - 10:42 | 2645387 Zero Debt
Zero Debt's picture

And Uncle Gorillas 10-year paper has jumped from 1.40 to 1.45. Must hurt.

Tue, 07/24/2012 - 10:38 | 2645374 Conman
Conman's picture

So when are the pleas for ECB to come in and buy on the open market coming? 3...2.....

Tue, 07/24/2012 - 10:38 | 2645376 BandGap
BandGap's picture

Like noticing the ride from a highway to a gravel road.  Going to get really bumpy.

Tue, 07/24/2012 - 10:44 | 2645394 toomanyfakecons...
toomanyfakeconservatives's picture

America's bumpy ride: The return of legitimate Treasury notes and CTRL-ALT-DELETE banking, the virtual dissolution of the federal government, and the MASS ARRESTS of thousands of top traitors from Obama and Brenanke on down. The fear-bots that dismiss this as fantasy are the same idiots who dismiss the power of tens of millions of American gun owners, patriots, active-duty military, reservists, veterans, police, federal marshalls, and so on, who took the oath to defend the Constitution. http://tinyurl.com/cd5cyjo/

Tue, 07/24/2012 - 10:41 | 2645380 Caviar Emptor
Caviar Emptor's picture

O Lordy! We got a...confidence...problem. That's not sexy.
Time to use eminent domain to seize houses, property and factories.
The funding mechanism will be "faith units"

Tue, 07/24/2012 - 10:41 | 2645381 Caviar Emptor
Caviar Emptor's picture

Dupe

Tue, 07/24/2012 - 10:41 | 2645382 SphincterSayBernanke
SphincterSayBernanke's picture

Giggity

Tue, 07/24/2012 - 10:41 | 2645384 asteroids
asteroids's picture

Unless those yoyo's in Europe act, and soon. Something VERY bad is going to happen. I suspect the plan is for everyone to go on vacation in August  and let the 'B' team figure it out. Or not.

Tue, 07/24/2012 - 10:42 | 2645386 machineh
machineh's picture

What is the quote on Spanish CDS today?

Tue, 07/24/2012 - 10:51 | 2645426 HoofHearted
HoofHearted's picture

No clue, but I just turned on Don Quichotte by Magazine 60. Highly recommend it. Of course I'm the same jackass that was playing REM when the guy was predicting the end of the world. Truly freaked out my students that I had the gall to be singing "...and I feel fine" right as the preacher guy was saying we'd all be done for.

Gotta love youtube for putting you in the right mood for the gallows. Get 'em Kyle Bass and the bond vigilantes! Let's get this shit over with so that we can pick up from the rubble and start to rebuild a more sustainable future for us and our children.

Tue, 07/24/2012 - 10:43 | 2645388 CVfriendship
CVfriendship's picture

Oh I get it.....they're in default...

Tue, 07/24/2012 - 10:43 | 2645389 ebworthen
ebworthen's picture

Concomitant with panic buying of U.S. Treasuries and Equities post European market close at 11:30 Eastern.

Tue, 07/24/2012 - 10:43 | 2645390 cebri88
cebri88's picture

don't worry, the next EU summit will solve all the problems. 

Tue, 07/24/2012 - 10:43 | 2645393 RobotTrader
RobotTrader's picture

As usual, the U.S. Consumer is unfazed by it all.

 

XRT still a stone's throw away from world record highs.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=xrt&inst...

Everything else may be imploding but the consumer cannot be stopped.

 

 

Tue, 07/24/2012 - 10:53 | 2645432 Deathrips
Deathrips's picture

What consumer are you talking about? Incomes down. Value of money worth-less. Quality of products way down ....the only reason we can afford anything.THat and Dumbos magic Fed-ther.

Im counting on fools like you robo...to make my shorts even sweeter.

You need a revision in simple math.

Tue, 07/24/2012 - 10:53 | 2645433 Deathrips
Deathrips's picture

What consumer are you talking about? Incomes down. Value of money worth-less. Quality of products way down ....the only reason we can afford anything.THat and Dumbos magic Fed-ther.

Im counting on fools like you robo...to make my shorts even sweeter.

You need a revision in simple math.

Tue, 07/24/2012 - 11:08 | 2645479 ebworthen
ebworthen's picture

RobotTrader,

Did you miss the UPS miss on top and bottom lines?

Also, Credit Cards are amazing things; U.S. Consumers do not see credit as debt anymore than the U.S. Government does.

Tue, 07/24/2012 - 11:45 | 2645607 Al Huxley
Al Huxley's picture

What the fuck are you talking about?  It's down .72% as I type.  When gold was down .25% it was 'in the dirt', but XRT drops 3x as much and it's bullish?  Fess up, you took a bath on the miners at some point in the past and have a permanent hate on for all things gold as a result, right?

Tue, 07/24/2012 - 10:45 | 2645398 bigdumbnugly
bigdumbnugly's picture

"...in all its gravitational glory"

yeah.  gravity sucks.

just ask susan

http://www.celebjihad.com/celeb-jihad/susan-sarandon-saggy-old-lady-clea...

Tue, 07/24/2012 - 10:49 | 2645417 LouisDega
LouisDega's picture

I always had a crush on that girl. She is still beautiful. 

Tue, 07/24/2012 - 10:45 | 2645402 Dr. Engali
Dr. Engali's picture

Time for another summit.

Tue, 07/24/2012 - 10:47 | 2645408 Snakeeyes
Snakeeyes's picture

Love it. ALL 10 year sovs (except UK and Mexico) saw an increase in yields today.

http://confoundedinterest.wordpress.com/2012/07/24/recovery-house-prices-increase-while-flash-pmi-richmond-fed-down/

Tue, 07/24/2012 - 10:50 | 2645423 vote_libertaria...
vote_libertarian_party's picture

That is a creative way of saying BULLISH!!!

 

Loved the guys on Bloomie TV after the market close saying NOW is the time to buy Spanish and Greek gvt bonds.

 

I spy with my little eye some big money banks and hedge funds may have been too cute by half.

Tue, 07/24/2012 - 10:54 | 2645435 Snakeeyes
Tue, 07/24/2012 - 11:09 | 2645483 cebri88
cebri88's picture

BBVA and Santander hold more than 100 billion in SP bonds by the way. 

Tue, 07/24/2012 - 11:41 | 2645587 disabledvet
disabledvet's picture

"UBS is Creditanstallt" and "the German 30 year auction tomorrow" is what blows up the EZ.

Tue, 07/24/2012 - 12:32 | 2645857 Haager
Haager's picture

I don't agree, it will not be this auction. This auction will still give cheap money for Germany.

I do think that the numbers for Business Expectation and - Climate will give a big hit to the head tomorrow.

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