Although the latest bailout effort strikes us just as inadequate as its predecessors, the markets have calmed down considerably as a result.
Most likely, it was time for that to happen anyway – the moves in bond yields of the periphery have become 'parabolic' of late, and the same was true for credit default swaps. Such large moves in such a short time always lead to pullbacks – the events surrounding these pullbacks and moves higher are probably best described as 'trigger events', and the recent euro-group summit was one such trigger event.
Below is a brief update of the most important CDS and bond yield charts. As we have noted previously, it now appears likely that recent technical breakouts in yields will be tested before the major trend resumes.
Prices in basis points, color coded (and note that scales are different for every price or yield charted).
Click on charts to enlarge
5 year CDS spreads on Portugal, Italy, Greece and Spain – a very sharp pullback. CDS on Greek debt have come in over 1,000 basis points from their recent high. How far this will go remains to be seen, but CDS are notoriously volatile – click for higher resolution.
5 year CDS on Ireland, France, Belgium and Japan – also a sharp pullback (Japan obviously marches to its own drummer) – click for higher resolution.
5 year CDS on Bulgaria, Croatia, Hungary and Austria – same story – click for higher resolution.
5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – also coming back, but more reluctantly – click for higher resolution.
5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – click for higher resolution.
One year euro basis swap. The trend remains intact so far, in spite of the recent small bounce – click for higher resolution.
10 year government bond yields of Spain, Portugal, Ireland and Greece – not surprisingly, all coming in as well, note however that Spain's yields have not negated the recent breakout. We expect a test, followed by a resumption of the uptrend – click for higher resolution.
10 year government bond yields of Italy, Austria, UK (gilts) and the Greek 2 year note yield. The risky stuff is pulling back, the 'safe haven' yields are going back up. The comments we made regarding Spain also hold for Italy's bond yields – a retest of the breakout seems possible, but we expect the uptrend to resume thereafter – click for higher resolution.
Charts by Bloomberg