2s10s

2s10s

Overnight Review And A Look At Today's Snoozefest

As Goldman observed last night, the "metaboring" meme continues, as things go from boringer to boringest. Nothing notable has happened overnight. Some things that did happen was news that Spain is about to receive an emergency disbursement from its €100 billion euro bank bailout because of restriction imposed by the ECB on bank borrowings; Italian banks announced plans to dispose of more bad loans to avoid "potentially bigger losses" (to whom? the ECB?), non-voting Fed member Kocherlakota saying that cutting IOER would have a minimal impact (are you paying attention former visiting Fed advisor David "the Fed will bail everyone out always and forever" Zervos), UK retail sales coming in stronger on bigger gas and food purchases (so aside from being ignored for inflation purposes these are useful when extrapolating economic "growth"), July Eurozone inflation coming in just as expected unchanged at 2.4% Y/Y, China FDI collapsing 8.7% as data revealed the longest run of declining inward investment growth in China since the 2008-09 financial crisis sending local markets to 2 week lows as the MOFCOM said the country's 2H export outlook will be even more grim and Premier Wen said easing inflation (not in food) allows for more room to adjust monetary policy, a statement that had zero impact on domestic stocks. As a result we have seen minimal flattening in Spanish and Italian 2s10s, and a continued gradual drift lower in the EURUSD. And this, aside from another week of initial claims that will have the prior week's data revised higher, and a Philly Fed, may be as good as it gets, as volume is set to plumb another multi-year low, and with the 2s10s flattening again, guarantees that bank profits in Q3 will be atrocious, forcing banks to fire even more (or cause various unnamed market makers to accidentally activate 1000x buy algos).

LCH Hikes Spain, Italy Margins

Another day, another LCH margin hike on Spanish and Italian bonds. Spanish SPGBs which will have to post more margin beginning tomorrow are all bonds with a maturity between 0.75 and 3.25 years, as well as bonds between 10 and 15 years, as well as all short-term Italian bonds between 3.25 and 7 year, in effect offsetting Draghi's "reverse Twist" house of cards. Expect to see more flattening in the Spanish and Italian 2s10s curve, followed by more promises of imminent action by the ECB, which however, may finally be realizing that for Spain to actually demand a bailout, its 10 years will have to be closer to 10% than to 5%. Finally, if this ratcheting up in asset encumbrance in Europe doesn't send the VIX to single digits nothing will.

Europe Back To Abnormal As Spanish Selling Resumes

A funny thing happened in European peripheral bond markets: they sold off - Spain is wider across the board, with the 2 Year back over 4%, and the 10 Year threatening to blow out above 7% for the first time since the market was re-re-fooled by Draghi. Same in Italy, where the 2s10s is once again in flattening mode. In other words after getting Draghi right for one day, then flipping and confusing what he said for the next week, the market is back to being right in itis initial kneejerk reaction to the ECB head's words. One reason (among many) - a Rabobank report by Richard McGuire and Lyn Graham-Taylor which states that Spain won’t ask for more aid if more conditions are attached add to likelihood "crisis must worsen before it improves." Hmm, where have we seen an identical turn of the phrase before. Oh yes, here. Rabobank also adds that the ECB will have to show willingness to buy across the curve (not just in tenors of less than one year) when it does intervene. Of course, for that to happen, things must get far, far worse. Just as we explained to the five-year olds in charge of the market this past weekend.

Some Context On Europe's Sovereign Rally This Morning

As panties are being thrown at the feet of Mario Draghi all around Europe, and his comments are being heralded as 'confirmation' of Nowotny's restatement of absolutely nothing yesterday, we thought some context would be useful before we all cheer that all is well. Spanish and Italian 10Y bond spreads are still notably wider than the pre-EU-Summit 'panic' levels and dramatically wider than the post-EU-Summit best levels. Spain 2s10s, having flattened from 220bps to 60bps in a week has squeezed back up to 128bps as we can only imagine the bath-salting that caused a few people. The point is that this kneejerk reaction in an incredibly illiquid market at the front-end of the Spanish curve is nothing to rest your hat on yet. In fact, if there are more hints dropped of ECB restarting SMP then we suspect European asset managers will run to sell down their Spanish bonds to try and front-run the subordination this implies at the inevitable restructuring (as game-theoretically they know everyone else will also do the same).

The Spain Curve Inversion In All Its Gravitational Glory

UPDATE: *ITALIAN TWO-YR NOTE YIELD RISES ABOVE 5%, 1ST TIME SINCE JAN 11

While every wannabe bond-trader and macro-strategist can quote 10Y Spanish yields, and maybe even knows what the front-end of the Spanish yield curve is doing (and why), there are three very significant events occurring in the Spanish sovereign credit market. First is the inversion of the 5s10s curve (5Y yields were above 10Y yields at the open today); second is the velocity with which 2s10s and 5s10s have plunged suggesting a total collapse in confidence of short-term sustainability; and perhaps most critically, third is the record wide spread between the bond's spread and the CDS (the so-called 'basis') which suggests market participants have regime-shifted Spain into imminent PSI territory (a la Greece and Portugal) as opposed to 'still rescuable' a la Italy for now. As we pointed out earlier, there is little that can be done (or is willing to be done) in the short-term, and the inevitability of a full-scale TROIKA program request is increasingly priced into credit markets (though its implicatios are not in equities of course).

3 Month 'Slow' In Stocks As Everything Else Goes Nuts

UPDATE: Biggest down day in Faceplant since 5/29 (down 8%) to close at $28.25 on double recent volume.

This was the narrowest day's range in S&P 500 e-mini futures (ES) in over three months and volume was dismally slow as it clung to its 50DMA amid larger than normal average trade size. Elsewhere, markets were anything but dead. Commodities dipped and ripped with WTI breaking back over $88 on Saudi news and Silver/Gold/Copper all ending around unch on the day but leaking off their highs into the close (though well off lows). For a while 'bad was good' as the retail sales print prompted QE-on-esque trades with Gold up, USD down, and Treasury yields plunging to near-record-lows. FX and commodities appeared to catch up to stock's more sanguine view of things from Friday but once there, Treasury yields reversed and rose into the afternoon as EURUSD continued to rally back well into the green (repatriation?) dragging the USD down 0.25% from Friday's close. Credit notably underperformed equities on the day (with HYG stumbling into the close). It seems everyone is waiting with baited breath for Bernanke's speech tomorrow and VIX (which is back in line with realized vol for the first time in 5 months) limped higher by around 0.4 vols to 17.1%.

European Stocks Revert Back Down To Credit's Pessimism (As 2Y Swiss Drops To Record Lows)

Just as we noted yesterday, the ludicrous late-day ramp in European equity markets relative to the absolute nonchalance of credit (corporate, financial, and sovereign) markets, has now reverted totally as broadly speaking Europe ends the day in the red. Spain and Italy stock indices bounced a modest 0.5% on the day as the UK's FTSE and Germany's DAX suffered the most (down 1-1.5%) on Banking Lie-Bor drama and unemployment respectively. Corporate credit leaked a little wider on the day with the investment grade credits underperforming (dragged by weakness in financials). Financials were notably weak with Subordinated credit significantly underperforming Senior credit (bail-in anyone?). Sovereigns were weak overall (not just Spain, Italy, and Portugal this time) as Spain's 2s10s has now flattened to year's lows. Swiss 2Y rates dropped further - to record closing lows at -35.2bps (after being -39bps at their best/worst of the day - suggesting all is not well, and Bunds largely tracked Treasuries as the SCOTUS decision came on and pushed derisking across assets. EURUSD tested towards 1.2400 early on but is holding -35pips or so for now at 1.2430.

European Stocks Soar (And So Do Peripheral Bond Yields!)

It's another one of those hope-fueled days in Europe as European stock indices across evey nation close comfortably in the green as the EU Summit begins. Germany has taken all the substantive things off the table and Cyprus and Portugal threw in the towel but nevertheless, stocks are 1-2.5% higher (with Italy and Spain outperforming). We assume this is reflexive pricing of 'the crisis is now so scary that the ECB will have to do something' but it seems the FX and Sovereign bond market missed that pre-emptive hope-driven view as Portugal yields/spreads spiked, Spain pushed back up to 6.93% and saw further flattening in its yield curve (as short-dated LTRO-enthused bonds underperform dramatically) as 2s10s is almost back to six-month pre-LTRO levels. Italian spreads pulled off their worst levels to close mixed but remains over 40bps wider on the week. EURUSD closed down over 35 pips at 1.2450 and stocks were in a world of their own also relative to credit markets today.

European Bloodbath As Merkel Won't Go Dutch

Equity, credit, and sovereigns all ugly. Merkel's unequivocal comment on her nation's unwillingness to 'share' burdens and slap the proverbial cheek of Monsieur Hollande, Italy's banking union looking for more 'aid', Spain actually asking for their bailout, Greece 'avoiding' reality, and Cyprus pulling the 'China rescue plan' last ditch retort to market angst; but apart from that, things are dismal in Europe. Italy down over 4% and Spain almost as bad on the day as every major equity index is well into the red. Italian banks monkey-hammered down 6/7.5% and halted a number of times. Investment grade credit outperformed (though was notably wider) as financials (subs and seniors), XOver, and stocks are plummeted to 11-day lows. After breaking below the pre-Spanish bailout levels on Friday, Spain and Italy 10Y are now 20-40bps wider with Italy and Spain 5Y CDS notably wider and well over 500bps. Notably the short-end of the Italian and Spanish curves underperformed significantly (curves flattened): 2Y BTPs +57bps vs 10Y +21bps; 2Y SPG +37bps vs 10Y +17bps. Europe's VIX snapped back above 27% (and we note that our EU-US Vol compression trade is moving well in our favor). EURUSD has been smacked lower by over 80pips ending under 1.25 once again.

European Bloodbath Continues

Europe was a sea of red (apart from Bund prices) today. With yesterday's window-dressing done and overnight dismissal of Spain's hopeful ECB-workaround, European equity and credit markets were dismal, EURUSD ended under 1.2400, and 2Y Bunds at 0.00% yield. Financials underperformed in stocks and credit with senior bank spreads back up to 300bps and LTRO Stigma jumping 12bps to 177.5bps (near record wides). Spain and Italy dominated both single-name banking and non-banking credit and equity moves as well as sovereigns with Spanish 10Y now +45bps on the week and Italy +37bps (with Belgium, France, and Austria all around 9bps wider). All European equity indices are down for the week with Spain down almost 8%. EUR-USD 3Y basis swaps turned back lower (worse) back to -70bps - not a good sign for funding (especially in light of the drop in LTRO we noted yesterday). On a final note of despair, Spanish 2s10s is now flatter than at any time since LTRO1 - implying that any LTRO debt used to fund a real carry trade is now a loser.

LTRO Failure Full Frontal As Spain 10 Year Approaches 6% Again

US data this week is relatively sparse (as usual in a post payroll week) leaving little evidence over the next few days to progress the seasonality debate but after a long weekend of derisking in mind and now in reality, Europe is front-and-center once again. Spain (and less so Italy) has decompressed to its worst levels of the year (5.96% yield and 425bps spread on 10Y) has now lost all of the LTRO gains as the curves of these liquidity-fueled optical illusions of recovery bear-flatten (as front-running Sarkozy traders unwind into the sad reality - most specifically for Spain - that we described in glorious must read detail here). Divergence and decoupling remain sidelined also as Deutsche Banks' Jim Reid notes the 4-week rolling beat:miss ratio in the US macro data has fallen to 24%: 73% (3% in line) from a recent peak at a string 70%:30% on February 29th. His view is still that in a post crisis world, especially as severe as the one we've just been through, Western growth is going to continue to be well below trend for many years and with more regular cycles. With Spain teetering on the verge of a 6% yield once again, we are still off the record wides from late November but not by much as the vicious cycle of sovereign-stress-to-banking-stress-to-banking-stress re-emerges in style. The European situation is still incredibly political and while we'd expect much more intervention down the line, expect the discussions and rhetoric to be fairly tough. The ECB last week indicated that they felt the recent widening in Sovereign spreads was more due to sluggishness in the pace of reforms. They are therefore unlikely to intervene in a hurry. So if Europe does need further intervention it is likely to need to get far worse again first.

Treasuries Poised For Breakout As Key Technicals Taken Out

By now everyone and their dog knows Treasuries are on the move. The move, however, is sizable as 10Y yields break above their 200DMA for the first time in almost five months. This is the second largest two-day jump in yields in 16 months as the market wonders whether this is the breakout where 's##t gets real' or a test of resistance at the October 2011 spike highs. Only AAPL time will tell.

Why The LTRO Is Not A "Risk On" Catalyst

Over the past month, much has been said about the recent 3 year LTRO, and its function in stabilizing the European bond market. Certainly it has succeeded in causing an unprecedented steepening in European sovereign 2s10s curves across the periphery (well, except for Greece, and recently, Portugal) as by implication the ECB has made it clear that debt with a sub-3 year maturity is virtually risk free, inasmuch at least as the ECB is a credible central bank (and if it is perceived as no longer being one, there will be far bigger issues), along the lines of what the Fed's promise to keep ZIRP through the end of 2013, and today's likely extension announcement through 2014. Yet does filling a much needed for European stability fixed income "black hole" equate to a catalyst for Risk On? Hardly, because as in a new note today Brockhouse Cooper analysts Pierre Lapointe and Alex Bellefleur explains, the LTRO is "not a catalyst for a risk-on rally as the central bank is substituting itself for funding sources that have “dried up.” Sure enough - all the ECB is doing is preserving existing leverage (especially in light of ongoing bank deleveraging), not providing incremental debt, something which could only be done in the context of unsterilized bond monetization ala QE in the US. So just over a month in, what does the LTRO really mean for Europe (especially as we approach the next 3 Year LTRO issuance on February 29)? Here is Brockhouse's explanation.

Volume Crashes As Stocks End Unchanged

Amid the lowest NYSE volume of the year (-24% from Friday - OPEX) and pretty much the lowest non-holiday-period volume in 9 years based on Bloomberg's NYSEVOL data, ES (the e-mini S&P 500 futures contract) ended the day almost perfectly unchanged underperforming 5Y investment grade and high-yield credit indices on the day as both moved to contract tights (their best levels since early August last year) even as their curves flattened. There has been lots of chatter about how the steepening of the short-end of the European sovereign bond markets (Italian 2s10s for instance) is a sign that all-is-well in the world again, well unfortunately the flattening of the short-end of US IG and HY credit markets sends a rather less positive signal than headlines might care to admit (as jump risk in the short-term remains 'high' relative to bullish momentum in the medium-term). At the same time, vol markets are showing extreme levels of short-term complacency as 1m VIX is almost at record low levels relative to 3m VIX (and diverging today from implied correlation). Broadly speaking , risk assets rallied into the US day session open only to sell off into the European close (with Sovereigns leaking back the most). The afternoon saw risk rallying as the path of least resistance appears to be up all the time there is no news. Stocks ended well off their highs of the day, in line with broad risk assets, as TSY yields rose 3-4bps higher, Oil and Copper 1.5-1.75% higher (outperformed) while Silver and Gold hugged USD weakness at around a 0.5% gain from Friday's close.

Italian Bonds Surge To Early November Wides

10Y Italian bonds (BTPs) ended the day at their second-widest closing spread to Bunds ever (at 533bps). Only November 9th saw a wider closing print and of course we saw margin hikes at LCH CC&G. 10Y yields are at 7.16%, their highest since just after Thanksgiving but we do note that 2Y yields have stabilized at around 5.00% yields (having peaked near 8% during thin Thanksgiving trading). It seems apparent that perhaps traders front-running LTRO's impact have compressed the 2s10s term structure but much clearer to us is Mr. Market's obvious desire for more money-printing now as BTPs are pushed to unsustainable levels once again - and the banking-to-sovereign vicious circle transmission of insolvency cranks up.