A very odd week in Europe. European stock indices dropped 2-3% on the week (though interestingly Italy rebounded quite aggressively off the lows today to end only -0.5%) with financials notably off mid-week highs. Swiss 2Y rates closed at their lows (under -3bps) - almost 3 month lows as safe-havens remain bid. Europe's VIX is notably higher this week. But away from equity weakness and safety flows, Bunds were sold and Italian and Spanish bonds were bought with both hands and feet (biggest 4-day rally in a month). We can only imagine that the devastation overnight in the JGB market combined with the biggest 2-day jump in EURJPY in 5 years has squeezed hedges and liquidations everywhere. Italian bond spreads are 30bps tighter this week!!! Spain -22bps, and Bunds have underperformed Treasuries by 9bps. The other explanation is of course that the Spanish pension fund just allocated the remaining 3% to peripheral bonds.
Spanish bonds flat to better while Spain stocks have been hammered...
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and close up - something changed...
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and even closer up - the EURJPY ramp coincided perfectly with the ramp in peripheral bonds...
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Europe's VIX is 4 vols off the midweek lows...
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but the disparity between bonds and stocks this week is very odd...
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as EURJPY is up an amazing 5.6% in the last 2 days...
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Perhaps that explains the move in peripheral bonds? the massive surge in FX carry - which typically ravages stocks higher - has seen that correlation implode and maybe, just maybe, the fast money carry traders are pushing bonds with that carry - we suspect that will not end well and 2 wrongs do not make a right!!
Charts: Bloomberg