Whether it was the truthiness of Willem Buiter's comments this morning, the sad reality of Spanish housing, or more likely the ugly fact that LTRO3 is not coming (as money-good assets evaporate), today was broadly the worst day of the year for European sovereigns. Spanish 10Y spreads jumped their most since the first day of the year, Italian yields broke back above 5% (and spreads broke back over 300bps), and Belgium, France and Austria all leaked notably wider. Since Friday's close, Italian and Spanish bonds have suffered their largest 2-day losses in over 3 months. Notably the CDS markets rolled their contracts into Monday and perhaps this derisking is real money exiting as they unwound their hedges - or more simply profit-taking on front-run LTRO carry trades but notably the LTRO Stigma has exploded in the last few days back to near its highs. European equity markets are now underperforming credit - having ridden the high-beta wave far above credit markets in the last few months (a picture we have seen in the US in Q2 2011 and HY is signaling risk-aversion rising in the US currently in the same way). Just how will the world react to another risk flare in Europe now that supposedly everything is solved?
European Sovereigns had a bad day...
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Italian Spreads broke back over 300bps in a hurry...
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Which was the largest 2-day rise in spreads in 3 months...
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And Spanish spreads had their worst single-day move in 2 months...
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But the banking sector suffered the most with the LTRO Stigma exploding over the last few days (as we suspect hopes of an infinite LTRO subside - and the CDS roll leaves unhedged players taking profits and not rolling)...
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Charts: Bloomberg