The ascent of Spanish bond yields continued on Friday (via Bloomberg):
And according to some analysts, much of the price deterioration was connected directly to Spanish bond illiquidity.
Stefano Di Domizio of Lombard Street Research, for example, noted the degree to which traded volumes had fallen this week.
As he wrote on Thursday:
What we likely have at the moment is dealers sitting on big (and still growing) piles of Spanish and Italian govvies which they cannot get rid of in secondary markets, as demand from non-bank investors is not there.
If you bought the Apr-15 Bonos one month ago (funded at the ECB), you would have earned about 4bp on carry. Over the same period of time however, Apr-15 Bonos’ yields have jumped about 130bp, killing carry-earning strategies like the ones dealers have been stuck with.
Over the past couple of days, Spanish govvies’ MTS trading
volumes have dropped substantially, which may be the start of the bond market’s liquidity drought we anticipated in our research note “EA debt liquidity squeeze shaping up” earlier this week (see enclosed chart). More on this in GIO monthly out next week.
And nothing much had changed by Friday, he told FT Alphaville in an update.
Of course, readers will remember that it was exactly this sort of liquidity crunch that ended up playing havoc in the Greek repo market — freezing it eventually.
That’s not to say Spanish repo markets have capitulated already, but it is a space worth watching — especially since Spain has a similar forced auction procedure in the event of settlement fails, which in the event of a squeeze could prove pretty painful for anyone distressed in the market.
Of course, what Spain does have going for it is that its repo market is now cleared by LCH.Clearnet — a fact that will definitely help soothe any counterparty jitters.
Related links:
Frozen in the Greek repo markets – FT Alphaville
Spanish contagion heads for the bonds [updated] – FT Alphaville
Contagion fears over ‘too big to bail’ Spain – FT
Spain shakes, rattles and rolls – FT Alphaville