Welcome back, UK readers!
So the weekend that some folk were predicting things would have to get real for the eurozone came and… nothing much happened. Except that Spain really came out and said its banks need help, by which it most definitely did not mean the kind of help that might be construed as a ‘bail-out’. Oh and G7 finance ministers had a chat on the phone and… nothing much happened. Read more
Italian 10-year bond yields jumped back above the key 7 per cent level on Thursday, despite relatively successful eurozone debt auctions, says the FT. Spanish 10-year yields also rose, in a sign of continuing nervousness over the region’s peripheral bond markets. Italian yields stood at 7.06 per cent and Spanish yields at 5.63 per cent. However, the eurozone rescue fund saw relatively strong demand for new bonds on Thursday, selling €3bn in three-year bonds, with order books rising to €4.5bn. The bonds were priced at yields of 1.77 per cent or 149 basis points over German Bunds. Although the yield spread over Germany is much higher than the first EFSF deals of last year, it is lower than the peaks of close to 300bp for five-year bonds seen in the secondary markets in late November.
Ok, who moved first?? Was it you, bond yield? Or was it you, CDS spread? It was you, wasn’t it.. Quick, shoot the messenger! Get him!!!
Maybe that’s not exactly what’s happening in the discussion of the transition mechanism between CDS spreads and bond yields. But the topic has become so politicised it can sometimes seem that the angry villagers are on a rampage. Read more
The cost of funding for Spain and Italy surged again on Monday, the WSJ reports, amid ongoing concern over Europe’s finances. By Monday afternoon, Spain’s debt was being traded at a yield of 6 per cent, or 3.24 percentage points above German bonds. This compared to 5.7 per cent last Thursday, just as news of the new bailout deal for Greece began to emerge. Italy was paying 5.5 per cent, up from 5.2 per cent on Thursday, but down from 5.8 per cent on July 18. Bond investors are grappling with the details of the new bailout plan, reports the FT.
Hot on the heels of Portugal’s two-way CSA, comes a partial step from Spain.
From the excellent Chris Whitall, over at Risk Magazine: Read more
RBS are back with an update of their European stress test tracker. And they’re starting to sound a wee bit nervous, noting that, “the stress tests might have failed to ring fence the periphery.”
Warning: This is not your standard PIIGS Club Med European peripheral CDS post.
Risk’s excellent Duncan Wood reports on Tuesday that Portugal’s debt office is now agreeing to post collateral to derivatives dealers. That’s the industry standard one-way CSA turned on its head. Read more
The rally in credit and equity markets lost momentum today amid a dearth of news, either positive or negative. The Markit iTraxx Europe index was over 1bp wider at 75bp, while the Markit iTraxx HiVol was trading around 111bp, about 1.5bp wider. The Markit iTraxx Crossover index underperformed its investment grade siblings, widening by about 9.5bp to trade around 417bp.
The sovereign market has not been as eventful as last month. But it is still active, and today sovereign spreads lost ground, the first significant widening since the 25th of February. The Markit iTraxx SovX Western Europe index traded 3bp wider at 71bp today, with Greece and Portugal back in their familiar role as laggards. Greece was the main widening influence, its spreads moving back towards 300bp. There was little in the way of fresh news, and it is likely that there was some profit taking after the considerable rally (-120bp) over the last seven business day. Reports suggesting the proposed European Monetary Fund would need a new EU treaty are also negative for peripheral names. Read more
Here’s a simple exercise, mapping financial sector credit risk against sovereign risk in Europe using data from CMA Vision:
Gavan Nolan of Markit wrote this CDS report
European credit indices rallied today as the economic climate remained supportive of risk assets. The Markit iTraxx Europe index closed at 84bp, 1.5bp tighter than yesterday’s level. Both the Markit iTraxx HiVol and Crossover indices outperformed relative to the main and equities, tightening to 132.5bp (4bp, 3%) and 512bp (14bp, 2.7%) respectively. Read more
Gavan Nolan of Markit wrote this CDS report
The difference between sovereign and corporate CDS spreads in Europe this week reached its smallest level since February as public finances came under increasing scrutiny. The Markit iTraxx SovX Western Europe hit 65bp on Thursday, its widest level since it began trading in September. Prior to this, the SovX was a benchmark, non-tradable index. The deterioration in sovereign credit risk – the SovX was trading at only 50bp last Thursday – was all the more surprising given the solidity in the corporate CDS market. The Markit iTraxx Europe index has been trading in the 82-86bp range this month, close to its recent tight levels.
If risky assets, driven by a weak dollar, are rallying why is sovereign debt under such pressure? It is no secret that many governments are running large budget deficits. But one country in particular has caused investors to question its credit standing. Greece has seen its CDS spreads widened sharply this week to 185bp, dragging the rest of Europe with it. Last Friday, EU figures confirmed that Greece is still in recession and the OECD forecast yesterday that the Greek economy will continue to shrink in 2010. The government acknowledged that its deficit will hit 12.7% of GDP this year, the largest in the eurozone. This figure was a significant revision from its previous estimate, and skepticism about the accuracy of government statistics has contributed to negative sentiment. Read more
Emerging market sovereign spreads appear to be on a steady tightening path.
In fact, data compiled by RBC Emerging Markets Monthly Analytics show this to be the case in every regional class they follow bar Argentina. Read more