I noted yesterday that, over the weekend, the situation in Spain had deteriorated markedly as rumors swirled that six of the countries' regions would seek to tap the country's regional bailout fund and protestors converged on the capital to speak out against austerity measures designed to bring down the country's debt load and reign-in public spending. While Friday's market was grim (IBEX down 5.85%, 10-year yields pushing 7.24%, and 2-year yields spiking 59bps), the bottom has truly fallen out today.
In an act of desperation, Italy (re)introduced a ban on the short selling of financial stocks, followed shortly by Spain. Spain's ban includes OTC instruments and derivatives as well, and while Italy's ban will purportedly last only 1 week, the Spanish ban will be in place for at least three months. Of course, banning trading in instruments designed to hedge against declining prices invariably leads investors to believe that the problem may be worse than previously indicated, and quite often serves to exacerbate the very thing its implementation was intended to prevent. That is precisely what is happening today.
Spanish equities are down nearly 3% as of this writing, while yields on Spanish 2-year bonds are up a staggering 78bps. Yields on these notes are now up 137bps in two days. Meanwhile, yields on the Spanish 10-year rose 22bps to 7.49%, and are now well above highs hit in November. Safe haven securities are outperforming notably with the U.S. 10-year Treasury yield now at record lows, trading 100bps lower than they did just four months ago, and touching a low below 1.40%.
I said last week that investors should begin to consider how to hedge against an inevitable Spanish bailout. It appears that prediction may play out sooner than anyone anticipated--the "fat tail event" Ray Dalio of Bridgewater Associates warned against last month is here. Reports are now surfacing that at least 10 Italian cities are in danger of losing control of their finances. The dominoes are falling. It may not be too late to by protection. I recommend (again) going long put options on the S&P 500 (SPY), or going long volatility.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.