Wednesday, 3 July 2013

Peripheral debt markets

I'm sure everyone has seen the recent political problems in Portugal, with various ministers threatening resignations and various conflicts regarding austerity. While this is interesting, the debt markets are showing the true picture.

Below shows the 10yr Portuguese bond with a histogram of the 2s10s below, there has been a sharp rise in the past few days, leading to a 150bps flattening of the 2s10s, as you can see, it is currently a long way of the 2011 inverted curve structure but still echoes those times with huge volatilty.

PT10's and 2s10s. Reuters
Next shows the past few trading sessions for the 10s

PT10 tick. Reuters
An impressive move from 6.5% to over 8% has been seen in merely 2 hours of trading, as can be seen volatilty was high for most of the session, ending 50bps off the highs!! On top of the this the Benchmark spread (vs. bunds) traded at >605 bps on the highs.

But what was seen on this 150bps move higher was a near 10% drop in prices as clearly some rather large funds/IB were clearing out Portuguese bonds from there books in almost a fire sale manner.

PT's CDS' are now at 395/415bps and representing a 30% chance of default over the 5 year timeframe. the Spread is merely at levels from March/April but over 100bps higher than mid-May.

PT 5Y CDS ask spread. Reuters
Unforuntaley (for Europe) there was a hint of contagion as other peripheral debt markets sold off hard through a wave of risk off during early European session.
ITDE spread. reuters
As we can see the spread is exhibiting a bull flag pattern which spells trouble as a potential move higher could be seen, targets above is of course the 300bps level, but on top of that the 30bps flagpole would suggest 315 is a viable move.

Overall Draghi should be key tomorrow, and some further headlines from Portugal are to be expected so heads up.

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