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