Liquidity Is Evaporating in European Sovereign Debt Markets - Again

Includes: HYG, JNK, SJB, SPY
by: Peter Tchir

Portuguese 10 year bonds now yield 12.1%. That is 137 bps more on the day. Ireland also yields just over 12%, but this is "only" 73 bps more on the day.

Even more interesting is the move in 2 year bonds. Both of these countries' 2 year debt is well over 14% and moved over 200 bps on the day.

French and German bonds are actually up in price, as investors in Europe are de-risking.

SOVX is back to 245. That is above where it closed on Friday June 24th. SPY closed that day at 126.8 and closed yesterday at 133.81. HYG closed that Friday at 89.47 and finished yesterday at 91.33 (and paid a 0.58 dividend).

Yes, the data at the end of last week was helpful, but it wasn't that great and I would take this opportunity to sell out of some risk in stocks (NYSEARCA:SPY) and junk bonds (HYG, JNK).

The high yield market seemed to have some quarter end window dressing built in, as investors took advantage of the supportive stock market to lift some bond offerings and drive prices up coming into the end of the month. The CDX indices had a very typical short covering rally. The hedges outperformed the broad markets as shorts capitulated and investors rushed to take off hedges. IG16, for example, went from trading 4 to 5 bps cheap at the height of the concerns to 1 bp rich by the end of last week, according to Bloomberg. That basis is starting to widen again as investors look for hedges. The cheapness is still tolerable and is the most effective hedge, but if we get much more widening, the weakness will have to trickle into the underlying markets more.

SJB is a decent way to short the high yield market. I think today we can see high yield perform in line with equities on the way down for at least a few percentage points, with far less risk of a gap up.

Disclosure: I am short SPY, HYG.