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Spreads on Belgian bonds hit a new high this morning and Italian bonds continue to sell off with yields approaching their all-time high. Usually on a day like this we would see what we call ”flight to quality.” But the definition of “quality” is rapidly changing. This morning’s auction of German government bonds was extremely poor:

From CNBC: “It couldn’t have been much worse. We’ve seen failed auctions before, but the scale of failure of this auction is of a different order,” Marc Ostwald, chief economist at Monument Securities, told CNBC.com.

After all the concern here is that Germany may have to step up to support the rest of Europe, which is not positive. The result is ugly. The "risk assets" are all down:

  • U.S. S&P500 Futures: down 1%
  • HY CDX7 (corporate credit): price down 0.3%
  • Oil: down 2%
  • Copper: down 2%
  • AUD: down 1.5%

So you would expect capital to flow into “safer” assets (the traditional "safe havens"). But that’s not happening.

  • 5-Year Bund: price down 0.6%
  • 10-Year Treasuries: price down 0.3%
  • Gold: down 1%
  • Yen: down 0.5%

It certainly looks like global deleveraging, but where is all the capital flowing? U.S. short-term bills continue to trade at zero or even negative discount rate. Some capital is going into that. But the traditional safe haven securities are losing their luster quickly.

Source: The Fleeting 'Quality' In Capital Markets