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...
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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...
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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)...
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but the credit markets were not buying the late-day exuberance...
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Europe's VIX is under significant pressure...
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Charts: Bloomberg