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Spanish 10 Year Briefly Crosses 6.00% And Portugal Active

Tyler Durden's picture
Submitted by Tyler Durden on 04/20/2012 09:19 -0400



 

European sovereigns peaked in spread yield early this morning before the surprisingly positive German confidence data but while France, Belgium, Austria and more significantly Portugal are all improving, Spain and Italy remain far less positive in this small downtrend after two days of significant selling pressure. Both are now around 35bps post the US non-farm-payroll data with Spain cracking back above 6% yield (and remains above 500bps in 5Y CDS). For those wondering what is going on in Portuguese spreads, it appears CDS-Cash basis traders are very active, according to desk chatter, with the spread between extremely 'cheap' bonds and CDS compressing to 7 month narrows here - bonds remain 232bps wide of CDS though as liquidity, ECB subordination, and CDS trigger concerns remain (though this is in from over 700bps difference at its worst in late January 2012).

Spanish 10Y yield broke 6% yield, remain trending wider/higher, and 5Y CDS remains above 500bps...

Broadly speaking European sovereigns are wider post non-farm-payroll still with Spain and Italy +35bps or so. Note Portugal's plunge in spreads...

but Portugal's spread compression, from what we hear, is being driven largely by active basis traders (simplified - these traders will buy Portuguese bonds and then buy credit protection in the CDS market against those bonds - this locks in (via some more complex asset swapping and hedging) the spread differential between the bonds and the CDS). The massive basis between Portuguese bonds and CDS remains well over 200bps (compared to +/-20bps for rest of Europe) but has been tempting enough since it broke over 700bps. This theoretically risk-free spread carry is however (post-Greece) now carrying some event risk premia on the basis of - should Portugal need 'restructuring' what will that look like and will it trigger CDS in an appropriate way...

The illiquidity in Portuguese bonds in general means that any additional marginal bid from basis traders provides a false hope in the optics of bond spread compression.

Charts:Bloomberg

UPDATE: By request Spanish 5Y and 10Y CDS - the 5s10s curve is now at almost record levels of inversion (lower pane). Today has seen 5Y decompression and 10Y compression for a 11bps further inversion today alone.


 
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Fri, 04/20/2012 - 09:22 | 2360794 JeremyWS
JeremyWS's picture

Why do you use 5Y CDS and not 10YR, when the 10Yr is the main thing you look at?

Fri, 04/20/2012 - 09:50 | 2360896 credittrader
credittrader's picture

Added 5s and 10s - quite significantly inverted and shifted notably today. Didn't include 10Y in that earlier chart for this reason as 10Y seemed more technicals from curve flatteners than liquid quotes in 5Y. Hope this helps.

Fri, 04/20/2012 - 09:59 | 2360936 ZeroPower
ZeroPower's picture

As he stated above, and also 5yr is the standard more liquid CDS contract.

The key thing to point out between both 5s and 10s on the CDS is the inversion (this happened to Greece much earlier before the official "soft default"). Normally you'd assume the longer in time you go out the more chances of a default, but not in the case of a troubled sovereign as we see now with SPA.

Fri, 04/20/2012 - 09:31 | 2360813 LawsofPhysics
LawsofPhysics's picture

Are there any countries left that are not either directly monetizing their debt or interfering in their own currency to keep things going or remain competitive?

Fri, 04/20/2012 - 09:39 | 2360860 Oh regional Indian
Oh regional Indian's picture

Is the pope the head of the.....ahhhhh never mind.

Nice example of the rhetorical Question LOP.

In a race down-hill, it's now how well your legs can pump but how good you are at skill-fully applying your brakes.

ori

/socthr-e-never-too-late/

Fri, 04/20/2012 - 09:45 | 2360878 GetZeeGold
GetZeeGold's picture

 

 

TG it's Fryday.

 

Fri, 04/20/2012 - 09:44 | 2360874 SheepDog-One
SheepDog-One's picture

Pretty sobering, considering the last act of all failed empires and currencies is a mad dash to monetize their own debt....and everyone in the world is doing it now. The entire earth is a failed empire? Time to buy some new boots I guess, its going to be a long slog from here on out.

Fri, 04/20/2012 - 11:47 | 2361341 HardlyZero
HardlyZero's picture

B B but...its early Spring and the riots must be put off until Labor Day...so we can have our vacations on the Med...the teargas would just foul the air and ruin the yaht races and cruise reservations.

How many European and other 1000's are planning their Summer fun now based on the low prices and riot free environment ?

Fri, 04/20/2012 - 09:27 | 2360822 LongSoupLine
LongSoupLine's picture

Hmmm, according to futures, this must be bullish. After all, in this fair and balanced market, all data must be weighed with equal objectivity. sarc/

Fri, 04/20/2012 - 09:42 | 2360870 SheepDog-One
SheepDog-One's picture

Well I guess something must be bullish....cant have a Friday market open without the DOW opening up the usual +100. I guess.

Fri, 04/20/2012 - 09:30 | 2360839 Let The Wurlitz...
Let The Wurlitzer Play's picture

Any investor who trusts the CDS market on European debt deserves to get their head handed to them, especcially after the Greek nonsense.

 

Fri, 04/20/2012 - 09:34 | 2360846 Market Efficien...
Market Efficiency Romantic's picture

France just battered by CBOE floor trader on Bloomberg!!!! Short sov, short banks, short em all!

Fri, 04/20/2012 - 09:37 | 2360852 Croatian Patriot
Croatian Patriot's picture

Prepare for LTRO 7854855 LOL

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