Selected Credit Market Charts – Ominous Developments
Below is a selection from our usual credit market chart update – CDS on various sovereign debtors and banks, bond yields, euro basis swaps. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Friday's close – European markets are closed today on account of the Easter Monday holiday.
We decided to post this selection to show recent developments especially in Spain, but also to point out that our euro-land bank CDS index is breaking higher – a very ominous development.
Clearly European credit markets are once again under increasing tension. For instance, CDS on Spain have now almost returned to their previous highs and we know from past experience that bond yields tend to follow CDS spreads.
Moreover, we can now see the first signs of contagion effects in CDS and yields on other European sovereigns.
5 year CDS on Portugal, Italy, and Spain – note the big jump in CDS on Spain on April 5 – they are now almost back at their previous high – click chart for better resolution.
5 year CDS on France, Belgium, Ireland and Japan – here we can see that other euro-land CDS are becoming 'infected' again as well. Contagion seems to be coming back into play - click chart for better resolution.
Three month, one year, three year and five year euro basis swaps – a sudden turn for the worse - click chart for better resolution.
Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – this is an especially important chart in out opinion. The recent break higher in this index is bad juju indeed - click chart for better resolution.
10 year government bond yields of Italy, Greece, Portugal and Spain – suddenly yields are shooting higher in unison again, with the other weak euro-land sovereigns following Spain's yields higher - click chart for better resolution.
We must be alert to the possibility that the pause in the euro area crisis may be over. If that is the indeed the case, then a rocky period for 'risk assets' may lie directly ahead. Of course we can not guarantee that this is what is happening – the markets may yet pull back again and reveal these recent moves to be merely corrective in nature.
However, the economic situation Spain finds itself in is well known for being quite grim at this stage. As we have chronicled in these pages, the banking system is in dire straits, notwithstanding ample liquidity provisions by the ECB. Unless something happens fairly quickly that convinces market participants that the danger is once again postponed, this is a situation that could very quickly get out of hand again. In fact, if we were to bet, this is what we would be inclined to expect.