LTRO Failure Full Frontal as Spain 10 Year Approaches 6% Again

Author: Tyler Durden · April 10th, 2012 ·RGE EconoMonitor

US data this week is relatively sparse (as usual in a post payroll week) leaving little evidence over the next few days to progress the seasonality debate but after a long weekend of derisking in mind and now in reality, Europe is front-and-center once again. Spain (and less so Italy) has decompressed to its worst levels of the year (5.96% yield and 425bps spread on 10Y) has now lost all of the LTRO gains as the curves of these liquidity-fueled optical illusions of recovery bear-flatten (as front-running Sarkozy traders unwind into the sad reality – most specifically for Spain – that we described in glorious must read detail here).

Divergence and decoupling remain sidelined also as Deutsche Banks’ Jim Reid notes the 4-week rolling beat:miss ratio in the US macro data has fallen to 24%: 73% (3% in line) from a recent peak at a string 70%:30% on February 29th. His view is still that in a post crisis world, especially as severe as the one we’ve just been through, Western growth is going to continue to be well below trend for many years and with more regular cycles. With Spain teetering on the verge of a 6% yield once again, we are still off the record wides from late November but not by much as the vicious cycle of sovereign-stress-to-banking-stress-to-banking-stress re-emerges in style. The European situation is still incredibly political and while we’d expect much more intervention down the line, expect the discussions and rhetoric to be fairly tough. The ECB last week indicated that they felt the recent widening in Sovereign spreads was more due to sluggishness in the pace of reforms. They are therefore unlikely to intervene in a hurry. So if Europe does need further intervention it is likely to need to get far worse again first.US macro data is missing expectations more and more as US decoupling myths get exposed as seasonal adjustment folly… And Europe’s vicious cycle re-emerges as Yields… And Spreads break to near record wides once again… As Spanish 2s10s bear flattens at its quickest pace since the rally began…And Italy (while better than Spain recently) is also losing ground rapidly in yield and spread…We are still around 1% off the highs of November last year but 90bps off the lows of just a month ago. CDS is now only 25bps off its highs and is fairing worse as this has been less distorted by both SMP and the LTROs. So worrying times again, especially as the LTROs were a huge move. We fully expected the Sovereign crisis to have more mileage as we moved through 2012 as the honeymoon period of the big events of late 2011 faded (new Governments in Spain and Italy, LTROs, and a new ECB governor) and growth remained weak in the peripherals.

Charts: Bloomberg

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