Guest post by Peter Tchir.

Mind Boggling Performance in Spanish and Italian Bonds

Spanish 2 year yields are at 3.39%, or 50 bps better on the day.  There is ZERO liquidity, but even then it is almost unbelievable that on July 24^th, these bonds were yielding 6.77%.  That is a massive change.  It is completely dependent on Draghi supporting them.  Without clear indications that Spain will ask for help and the ECB will provide the help, this won’t last.  But so far, all indications are that Europe has had a change of heart.  Even in Germany, the dissent, while still there, is coming more and more from second and third tier players, rather than key figures.

Even the 5 year point is interesting.  Italy and Ireland (yes Ireland is back) have stopped gapping tighter, but are grinding away and now yield 4.87% and 5.50% respectively.  Spain remains a star with the yield down to 5.39% which is 36 bps better on the day, and Portugal, of all places, is now yielding “only” 9.4%.

Outright shorts ARE getting killed.  Whether you are short bonds or CDS the pain is palpable.   The “smart trade” which was allegedly to play the curve from a flattener is also getting crushed as the rally is definitely steepening the curves.

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