A few weeks back I noted that there was a discrepancy between what Spanish stocks were saying about the future of the country and what Spanish sovereign debt was signaling. Specifically I noted that over the course of the last several months, Spanish stocks tended to rise when yields on Spanish bonds fell. This of course makes all kinds of sense when you consider that when yields fall it generally means anxiety about the country's debt crisis is fading. This would also cause Spanish equities to rally.
As long as Spanish bonds are considered risk assets, this relationship should hold: equities are generally considered "risk-on" plays so when they rise, so too should Spanish bonds rally, causing the yield on those instruments to fall.
When this relationship inverts -- that is, when yields on Spanish bonds rise along with Spanish equities, it means that someone must be wrong. Either Spanish stocks are correct and there is a reason to be long-risk, or the sellers of Spanish debt are correct and there are reasons to be concerned. In recent days yields on Spanish debt have been moving up (again) in tandem with Spanish stocks:
(click to enlarge)Chart: YCharts
Of course, the exuberance Spanish equities are exhibiting is directly correlated to the Fed's announcement of QE3 and the ECB's announcement of its new bond buying program. However, one has to believe that the sell-off in Spanish bonds over the last several days indicates that the honeymoon period for periphery sovereign debt following the ECB's announcement of its OMT program is definitively over.
Yields on Spanish 10s have risen around 15bps this week while yields on shorter end notes like Spanish 2s are up 31 basis points in just two days. That isn't what you want to see if you are the ECB -- essentially this indicates that speculation about purchases of periphery short-term debt had more of an effect than the actual announcement of the plan.
This was expected. As it became apparent that a Spanish aid request would be delayed indefinitely for political reasons, traders were expected to once again pressure Spanish bonds. News that Spain will sell 8 billion euros worth of benchmark notes in an effort to backstop its faltering regions hasn't helped confidence. In the words of one Credit Agricole fixed-income strategist quoted by Bloomberg,
"We still need clarification on what Spain is looking to do. Are they going to try and tough it out for a while? Maybe that's playing on the market's mind."
All in all, the pressure is already returning to periphery sovereign debt, showing just how little of an impact the ECB's new promise has had on the market's psychology. Again, this demonstrates that the marginal utility of one more QE announcement is falling with each new iteration. Investors should continue to play for rising yields on Spanish and Italian debt and pressure on European equities (FEZ) once the stimulus effect wears off. I would be remiss if I didn't mention (again) that profits should be taken in U.S. shares and protection put-on in broad indices (DIA, QQQ, SPY). Selling at the top is always a good strategy.