European Stress Getting Progressively Worse As LTRO Boost A Distant Memory

The sad reality of an austerity induced slowdown in Europe and an ESFS/ESM as useful as a chocolate fire-guard seems to be creeping into risk asset premia across Europe (and implicitly the US). GGB2s are all trading back under EUR20 (that is 20% of par), Sovereign yields and spreads are leaking wider despite the best efforts of their respective banks to back-up-the-truck in the 'ultimate all-in trade' and the LTRO Stigma has reached record levels as LTRO-encumbered banks' credit spreads are the worst in over two months. Spanish sovereign spreads are back at early January levels and with Italian yields comfortably back over 5% and the bonds starting to reality-check back towards the much less sanguine CDS market. It seems apparent that much of the liquidity-fixing LTRO benefits are now being washed away as investors realize nothing has changed and in fact things are considerably worse now given encumbrance and subordination concerns and the increased contagion risk that the LTRO and the Sarkozy trade has created.

The LTRO Stigma is as high as it has ever been. LTRO-encumbered bank credit spreads are back to early January levels (while non-LTRO banks remain much more sanguine - less subordinated)...

GGB2s are all trading under 20% of par as the simple reality that nothing was fixed hits home...

And as pivot securities in Italy (broken 5% yields and bonds catching up to CDS)...

And Spain even worse as its sovereign risk premia (lower pane) reaches back to early January levels (and notably at the top of its 3 month channel)...

And this week has been ugly in general for European sovereigns - most especially the Italian and Spanish yields (which if they are in trouble the EFSFESM firewall simply cannot cope with), it seems the market is starting to test the political will in the Euro-area once again...

and while Portugal is better on the week quote notably - it is mostly related to the basis trade compression we talked about yesterday so do not read too much into it.

 

Charts: Bloomberg