Italian Yields Back Over 7%, CDS Passes 600, Futures Tumble On Abymal Spanish Auction, Lack Of Monti Government Consensus

It took Europe two days to go from fixed to fully broken all over again. Those curious why they are waking up to a see of red, Italian 10 Year yields back over 7%, stock futures tumbling, the EUR/$ sliding, Italian, French and Belgian CDS at fresh records, and a record scramble for Bund short-dated bonds (2 Year under 0.030%) is due to two main things: a failed Spanish auction now that contagion is back to sleepy Iberia, which sold €3.2 billion of bills, below the €3.5 billion target, with the yield soaring to 5.02% from 3.61% at Oct. auction leading to Spanish 2-, 10-yr yield spreads to Germany both significantly wider to records.  The second main factor is the realization that Mario Monti is not the second coming and will in fact face major resistance to form a government. Bloomberg reports: "Monti, a former European Union competition commissioner, struggled to get political parties to agree to participate in his so-called technical Cabinet during talks in Rome yesterday. A government lacking political representation will find it harder to muster support from the parties in parliament to pass unpopular laws. Monti said he’ll conclude his talks today." And if Monti can't do it, nobody can. Which explains why the fulcrum European security, the Italian 10 year BTPs, just fell off a cliff, and is now yielding back over 7% at a euro price of under 85 cents. This could well be crunch time: there are no more magic rabbits in the hat, or deus ex prime minister resignations in the hat for Italy.

More from Reuters on Spain's miserable auction:

Spain paid levels not seen since 1997 to sell 3.2 billion euros ($4.4 billion) of short-term debt on Tuesday as failing investor confidence in euro leaders' ability to handle the debt crisis forced up risk premiums.


Solid demand allowed Spain to sell at the high end of its target range of between 2.5 billion and 3.5 billion euros of 12- and 18-month bills. Debt-ridden Greece also sold 1.3 billion euros of a 3-month Treasury bill at 4.63 percent -- only two basis points up on the previous auction.


But the higher costs of borrowing on the Spanish issue reflected market moves that pushed 10-year bond yields to their highest since August, driven by concerns that Italy, the euro zone's third largest economy, will need a bailout.


A change of government in Italy gave markets barely a day of relief on Monday before investors went back into selling mode.


"The frightening part is just how much yields have risen since their last one. That is a colossal rise, it does really emphasise just how much anxiety there is," strategist at Monument Securities Marc Ostwald said.


"In terms of the actual yields, it doesn't bode well for Thursday's sale."

Instant reaction on the auction:


"In terms of allocation the auctions look rather poor, below the upper end of the targeted size range. The indicated 2.5-3.5 billion euro already represents a rather small size for a Spanish 12- and 18-month Letras auction but reflects th current market environment."

"(The rise in yields) certainly is a concern, but as long as the European Central Bank is providing unlimited liquidity, domestic banks have an incentive to acquire the bills and repo them right away with the ECB. That's also the reason why Greece can still issue bills."


"Quite contrasting, in the sense that the cover on the 18-month was that much better but on the other hand it was a much smaller size that they sold."

"The frightening part is just how much yields have risen since their last one. That is a colossal rise, it does really emphasise just how much anxiety there is."

"In terms of the actual yields, it doesn't bode well for Thursday's sale."


"The very high yields are proving very attractive for market participants who are bidding at the auction. On average, the T-Bill auction is a positive signal for the market that investors are still buying Spanish debt despite concerns as to what will happen after the Spanish elections with the budget consolidation programme."


"You can see a bit of relief that these bill auctions have gone through in a relatively sound manner... but yields are much higher than the previous sales and it shows that there isn't enough of a backstop from policymakers or the ECB to bring yields back down again."

The damage:

Obviously, there is a bubble in Spanish bond yields in November:

Italian 10 Year yield:

Italian BTPs price:

and ES: