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).

Spain and Italy spreads remain well above Summit levels

and Spain 2s10s has steepened but is well off recent exuberance...

as we gently remind readers that Spanish 2Y yields are still 5.75% - as high as they were in November at the peak of the crisis.

and while Italy's FTSE MIB is +4.5%, it is only back at Friday's close - which looks to us like a gap-fill push...

Charts: Bloomberg