2s10s

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.

Deutsche On QE3, It's $800bn Or Bust!

Buried deep in the 137 pages of Fixed Income 2012 Outlook, Deutsche's bond group looks at the implications of an extremely flat US Treasury Curve and implicitly low bond risk premium. Based on 5Y5Y rates relative to long-term growth and inflation expectations, tail inflation risks, and estimates of supply/demand shocks, the current bond risk premium are at levels that were witnessed ahead of the bond market sell-off of 1994, at the peak of the bond market conundrum of 2004-2006 and around QE announcements. This 100bps or so of 2s10s 'flatness' relative to real short rates and expected deficits also corroborates this risk premium. So what does this tell us? The extremely low risk premium fully captures QE expectations. Empirically, they find USD19bn of new QE tends to reduce real rates by 1bps and based on this and a model of fundamentals and risk aversion parameters, they find that Twist was fully priced in last September and since then the current dislocation suggests another full QE2-style package of about $800bn is already priced into the market (ex MBS reinvestment). We just hope the market is not disappointed.

Italian 5 Year Bond Rises To Record 7.847% In Aftermath Of Catastrophic 6 Month Auction

Italy held an auction for EUR8 billion 6 month Bills today. Unlike Wednesday's German 10 Year Bund issuance, the auction was not a failure (at least not yet), and for good reason - the yield paid for the Bill was 6.504%, the highest since August 1997, and is nearly double the October 26 auction when it priced at a now nostalgic 3.535%. But... the maximum target of EUR 8 billion was met without anybody's central bank have to retain anything. The bid-to-cover was 1.47 compared to a bid-to-cover of 1.57 one month ago and average yield of the last six 6-month auctions of 2.443% and average bid-to-cover 1.636. All sarcasm aside, this is an unprecedented collapse and a total catastrophe as Italian Bills now yield more than Greek ones - the market has basically said Rome needs a debt haircut and pari passu treatment with Athens. In the aftermath of the auction everything has come unglued: 2s10s is inverted at unseen levels, the 5 Year has hit 7.847% , and Euro liquidity is gone...it's all gone.. as the 3 month basis swap hits -157.5 bps below Euribor, the lowest since October 2008.

Spanish Yield Curve Inverts Most Since 1994

The spread between Spanish 2Y and 10Y bonds has dropped to record lows as the yield curve inverts most since 1994. Troughing intraday at -12bps at its most inverted, today's as-good-as-failed Spanish bill auction sends an ugly message to the market that risk appetite is non-existent. At -5bps, if we end today at this level, it will be the first inverted close since August 1994.

Futures Tumble, Spreads At Record, Euro Drops On Another Awful Spanish Auction; More LCH Margin Hike Rumors

Today is a rerun of Tuesday when it was all about the horrible Spanish auction. Well, let's use a different adjective for what came out of Spain today: dreadful, atrocious, awful: all words used not by us but by Wall Street experts to describe what just happened (see below). To summarize: Spain sold €3.56 billion euros of a new ten-year benchmark bond, well below the €4 billion targeted. The average yield on the bond was 6.975 percent, the highest paid since 1997, and almost 2% higher compared to the 5.433% paid on October 20. The highest paid for a ten-year bond this year was on July 21 when it paid 5.986 percent. The bid-to-cover ratio, an indicator of investor demand, was 1.5: this compares to 1.76 a month ago, and 1.95 average of the last 6 10 year auctions. The result: Spain Bund spreads are at a record 499 and about to pass 500 bps: the level at which LCH hiked Italian bond margins, and is resulting in another round of rumor of an imminent Spanish bond margin hiked which in turn would lead to more selling of sovereign bonds both in Spain and everywhere else. The Spanish 2s10s has collapsed and is under triple digits for the first time in years: at this rate it may well invert in days. And speaking of everywhere else, French Bund spreads hit a record 202 earlier, a level which will be promptly taken out; Italian spread tightened modestly after the ECB stepped in with another brief intervention which will be promptly steamrolled. It has gotten so bad, the EFSF spread to Bunds also just hit an all time record - kiss the EFSF goodbye. Lastly, futures are at overnight lows or just over 1220. Looks like we will have another Risk Off day at least until Europe close.

EFSF Spread Breaks 190bps Record As Europe Opens Weak

UPDATE 1: Chatter that SMP is in BTPs saving the EUR84.50 level again - rest of sovereigns remain weaker.

UPDATE 2: WTI $103

As traders hold their breaths for what will likely be a 'well-managed' French auction this morning, the sentiment from the late US markets is spilling into Europe as Sovereigns - especially France (record wides at 196bps), Italy, and Spain (record wides at 475bps) are all seeing yields and spreads surge. EFSF spread to Bunds just cracked 190bps for the first time as Italian 10Y spreads are back into the record-breaking zone from 11/9 and the Italian 2s10s curve is bear-flattening further by 13bps. ES managed to sustain a low volume recovery off spike lows after hours and is currently +0.5% (though leaking back) as European credit markets open leaking wider with XOver +13bps and Main +4bps. EUR remains under 1.3475 (and EUR-USD swap spread model is reverting back down towards EURUSD) as JPY strengthens modestly. Oil is diverging (higher - breaking $103!) from the rest of the commodity pack and is the main driver of a CONTEXT-based correlated-risk-basket rally (as TSYs drip back towards day low yields levels) that is mildly supportive of ES. Little sign of the ECB yet, but we suspect they are saving their fire-power for pre-auction shenanigans.

Risk Leaking Off As EURUSD Loses Late Friday Lows And Spreads Decompress

Some early excitement in credit markets with XOver and senior financials gapping tighter - trying to catch up to equities - has started to show signs of weakness as EURUSD just lost late Friday swing lows and sovereign spreads start to decompress. Broad risk markets are indicating more weakness for S&P futures as US TSYs are rallying. The shift in EUR has had its largest impact on Silver so far as dollar strength is a drag on commodities (though we note Brent priced in EUR is +1%) - though copper enjoyed the Asia session gaining over 2.5% from Friday's close. With the Italian bond auction later this morning it is no surprise that EFSF bonds are well off their tight spreads of the morning already and as EUR-USD swap spreads adjust, they are pointing to further deterioration in EURUSD from here. This modest pessimism is already reflected in the short-end underperformance across the European sovereign yield curves as flatteners appear popular once again.

Italy 2s10s Inverts For First Time Since August 1994 As French and Spanish Spreads Widen To Records

Dismal data from French manufacturing and industrial production along with growing chatter of a 'core' Europe strategy having been discussed is sending spreads among sovereign bonds notably wider. As a reminder Italy faces a rather large 1Y bill auction later this morning and the front-end of the BTP curve is underperforming as 2s10s inverts for the first time since August 1994.

Presenting Today's 10-Sigma Move In BTP-Bund Spreads

UPDATE: and in case you thought it was just Italy, the contagion is truly rotten to the core as OATs crack over 17bps wider to Bunds - the largest single-day widening in history and over 8 standard deviations.

Presented with little comment as we note the record-breaking move in today's spread between BTPs and Bunds is almost unprecedented and at 10 standard deviations is likely to have risk managers tapping trader's shoulders across many trading rooms. 2s10s and 5s10s curve inversion and a CDS-Cash basis that is now widening once again after some early compression just adds to the running-at-the-cliff's-edge feeling.

China's Yield Curve Inversion Signals Sharp Slowdown Ahead

UPDATE: While the on-the-run 2y yield did trade above the 10Y yield on 9/26 (2s10s inverted), Bloomberg's generic 2Y CNY yield index has not updated in three weeks meaning Mr. Darda's analysis is based upon faulty information. We do not ethat since late September's inversion, however, the curve has begun to steepen - which fits with the cycle turn analysis he discusses.

As we have heard a million times on hundreds of business media outlets, the US 'cannot' be in recession because the yield curve has not inverted. Well, unfortunately for the savior-of-the-universe Chinese economy, their yield curve (the 2s-10s differential) has just inverted for the first time -  suggesting, as per Mike Darda of MKM, the Chinese economy is “set to slow rather sharply” and that has “negative implications” for commodities tied to industrial growth. Following on from our discussion of the 1tn RMB deposit infusion bailout, Darda also points out (via Bloomberg) the 8 months-in-a-row of OECD Leading index drops, weakness in the China PMI sub-indices, and the fragility of the shadow banking system via cracks in the real estate market and notes, with a wonderfully indignant note on CB success: "It is worth remembering that the Fed has engineered only one soft landing in six decades of post-war monetary policy-making (1995)". Further to these concerns, the FT reports HSBC's CEO's concerns over the potential for an Asia credit crunch. Paging Dr. Copper?

As Italian Yield Curve Flattens Dramatically (8 Standard Deviations), Is JEF Facing More Stress?

Based on the detailed exposures and DV01s thet Jefferies released on Friday, which we discussed as evidence of an implicit 2s10s (approximate maturities) curve steepener, it would seem that the dramatic shift flatter in the Italian bond curve this morning could be problematic. The huge 35-40bps compression in the spread between 2Y and 10Y BTPs is the second largest ever (largest being 4/8/11) and represents an 8 standard deviation drop compared to the last 8 years. This could mean a significant loss for the JEF book - unless they are perfectly hedged through BTP futures - which it does not seem is clear from the exposure sheet. The Italian yield curve has flattened over 100bps since the end of the EU Summit - inching perilously close to inversion which hasn't been seen since 1994.

Europe Opening A Little Shaky - And No ECB To The Rescue Yet With BTPs

UPDATE 1: ES -1%, EUR -0.5%, CHF -1.5%, Gold +0.9%, 10Y TSY -2bps, Bund -4bps, BTP spread +25bps at 479bps!

UPDATE 2: BTP spread widest since Jan1996, BTP 2s10s flattest since Sep2008, and BTP yield highest since Aug1997.

With EURUSD trading back to overnight lows at 1.3740 (100pips off its overnight highs), BTPs just opened 8bps wider to Bunds at +465bps. Gold is clinging to $1770 as Silver, Oil, and Copper drop notably thanks to USD strength. S&P futures are 16pts off overnight highs now having retraced almost 75% of Friday's late swing higher. US TSY yields are compressing but relatively parallel for now and in line with Bunds.