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.

Fed Is 4 Times More Efficient At Selling Government Bonds Than The US Treasury... With A Taxpayer-Funded Twist

Something curious happened today. As we pointed out earlier, for the first time as part of Operation Twist, the Fed, instead of buying bonds in the open market, actually sold bonds: a departure for Bernanke, and only the first time the Fed has practically rebalanced its portfolio since the first Operation Twist 50 years ago. In essence, by dint of its adjusted mandate, the Fed became the Treasury - what proceeded at precisely 11 am was the announcement of a sale of $8.87 billion in bonds with maturities from January 31, 2012 through July 31, 2012, bonds that were sold not by the traditional issuer of bonds, but by the Fed. Granted no new money was raised by the US in the process, but it was still a curious development. What was far more curious was the staggering turnout by the Dealer community, which indicated an interest for, wait for it, a whopping $242.6 billion in bonds!  Said in conventional terms, the Bid To Cover was an unprecedented 27.3, or there was $27 in demand for every $1 of bonds finally sold by the Fed. Why is this worthy of bolding. Because, in a traditional Treasury auction, the Bid to Cover by the Dealer community is far, far lower. In fact, as the most recent 52 week Bill auction demonstrates, there was $89.5 billion in Bids for $14 billion in bonds allocated to Dealers, or a 6.4 Bid To Cover. Said otherwise the Fed is about 4.3 times more efficient at finding buyers than the Treasury. How is this possible? And should the Fed take over Treasury in all future bond sales? Nope: the answer is that this is nothing but yet another taxpayer funded gift to the (recently expanded by 2 Canadian banks) Dealers. Let us explain.

Citi Follows Bank Of America In Instituting Debit Card Fee, $1.9 Trillion In Deposits At Risk

When we reported that Bank of America will be the first bank to institute debit card fees we made the following less than insightful observation: "The problem is that the bulk of depositor clients will simply walk away from Bank of America (which had $1,038 billion in deposits as of June 30), and any other institutions that piggy back on this, and from a game theory perspective, everyone has to do it, or nobody will do it." Well, Citigroup, which had no other choice, has just decided to follow in BofA's footsteps, which i) proves there is indeed a collusive move of desperation by the bank cartel, which in a normal country would see at least a statement from Eric Rip Van Holder, and ii) our thesis about America's impatience with petty theft - they are more than ok with grand scale larson such as that by the Fed via shadow inflation and currency devaluation, but when it comes to paying up an additional $5/month, well, just look at Netflix, which instituted a $6/month price hike two months ago... and is now fighting for survival. As for the exemption requirements, they will likely be the same as Bank of Countrywide Lynch's: either have a mortgage with the TBTF behemoth, or have $20k in a deposit account - both which will likely not be much of a help to 90%+ of the bank clients. The biggest problem is that suddenly at risk are $1.9 trillion in deposits - $1 trillion at BofA, $866 billion at Citi. While the financial crisis did little to dent the banks' deposit buffer, it will be highly ironic if it is an act of the banks themselves that begins the great bank run that resets it all...

Boycott Bank Of America Which Is About To Institute A $5 Debit Card Usage Fee

Just when we thought we had seen every imaginable form of stupidity out of Bank of America, they go ahead and stun us all over again. The latest shock is that starting next year, the repository of hundreds of billions in underreserved (apparently the SEC finally figured out what was obvious to Zero Hedge readers since October 2010) toxic Countrywide mortgages, instead of shoring up capital, will do the opposite and start charging anyone with a debit card $5 a month fee for said card usage. Needless to say, this is obviously a collusive attempt by all the big banks, who are so desperate to generate some revenue (with the 2s10s flatter than at any time in the past 2.5 years) they are willing to drive away millions of paying customers. The problem is that the bulk of depositor clients will simply walk away from Bank of America (which had $1,038 billion in deposits as of June 30), and any other institutions that piggy back on this (and from a game theory perspective, everyone has to do it, or nobody will do it), and instead pull cash out of any and all checking and time deposit account forms. As a result, the key buffer that big banks have had during the entire financial crisis, cash from deposits, is about to disappear. This comes at a time when every US bank is fighting tooth and nail against Basel III implementation which forces banks to have more not less tangible capital (read cash, up to and including deposit cash). Alas, doomed for failure such idiocy can only come out of the US banking system which should have long been insolvent and replaced, but instead the Fed's policy of intercontinental Moral Hazard continues to encourage such "survival of the anti-fittest" decisions with pride. It goes without saying that we urge any and all of our 5 million monthly readers to pull any funds they may have from Bank of America in retaliation for this insanity.

2s10s, 30 Year Yield Pancakes As Bernanke Sets Off On Bank Carry Trade Deathwish

Congratulations Ben: you succeeded in getting the 30s to a near record low level (and by far the lowest for 2011) , which also means that the entire curve will soon be flat as a pancake, killing Net Interest Margin, aka curve carry for the banks, momentarily. Good bye Bank of America. Have fun riding that bear market rally with no financial leadership for the next several years.

Market Snapshot: EUR Strong But Everything Else Weak As Europe Closes

A turbulent session in Europe ended on an ugly note as broad equity markets closed near their lows, credit spreads near their wides, and financials gave up all their rumor-driven gains. EURUSD, however, managed a spikey end to the day, popping its head back above 1.37 after trending generally weaker all day.

Market Snapshot: Bipolar Market's "Lithium" Moment Hits Minutes Before Close

Another day, another roller-coaster ride in US equities as every other asset class was relatively well-behaved. We lurched from headline to headline all day long - up on some hope of a 'deal', down on news that nothing was achieved, up on 'progress', down on a revisit in October - but the lurches were much more evident in US equities than in FX, credit, TSYs, PMs, and commodities. These other markets were not dull by any means but did not exhibit the absolute schizophrenic paranoia that equities did and this was critical in getting a handle on trading today as with 30 minutes to go, equities tore back down from Friday's highs to reconnect with several fair-value models across broad risk assets and the credit markets (highlighted in our earlier European close snapshot).

As The Shadow Banking System Imploded In Q2, Bernanke's Choice Has Been Made For Him

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the "Twist" is already guaranteed, as is an IOER cut, per Goldman's "predictions" and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman's hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of "credit money." Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke's choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America's TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama's second term goodbye.