Spanish Bonds Slump Most In A Month As Europe Turns Red

Tyler Durden's picture

The fulcrum security is bleeding; 10Y Spanish government bond spreads jumped 19bps today, the largest gain in almost a month, and are trading back above 525bps over Bunds (the worst in over three weeks). Even the front-end of the Spanish and Italian bond curves lost ground today - as the game of chicken between Rajoy and Draghi continues - with the ridiculous brinksmanship highlighting the entirely dysfunctional dis-union that really exists behind the scenes. European equity markets drifted lower all day, slammed lower after the US opened (with Germany's DAX underperforming - thanks to weak Autos - no surprise there for us), but bounced a little into the European close. EURUSD slumped 70 pips from its post-US-open intraday highs today - ending at 1.2500. Europe's VIX jumped back above 28% (from 21% just 10 days ago) - its highest in a month. Credit widened on the day, financials underperformed, and notably credit did not jump into the close like stocks did.

 

Spanish bond risk is at its highest in over 3 weeks, rose its most in a month, and is back above 525bps as once again the raly stalled at the Nov 2011 'peak crisis' level around 470bps...

Buy why? What changed? We have for a long time discussed the thinness of EGB markets and in our humble opinion believe the relative richness or cheapness of Spanish bonds to CDS has been a major determinant of the bid- or ask-side of the flow... to wit: the following chart of the CDS-Bond basis for Spain - when Bonds are very cheap to CDS (low on chart) then Basis-Traders will step in and Buy Bonds and Buy CDS Protection to 'snatch' that diffferential; and the same way - when Bonds become too cheap, they will Sell Bonds and Sell Protection to lock-in that spread (the latter is harder to achieve given restrictions and costs). In between it is more real money at the margin...

 

European stocks tanked after the US open (as headlines hit) but staged a BTFD comeback into the European close - as US equities were levitated back up to VWAP to save the day (for now)...

but the credit markets were not buying the late-day exuberance...

 

Europe's VIX is under significant pressure...

 

Charts: Bloomberg