Overnight, Italy paid 6.504% to borrow for six months: up 353.5bps from the prior Auction (and up ~406bps from the average of the prior six Auctions). Their 2yr yield rose 34bps to 7.66%; 5yr +21bps to 7.74%; 10yr +15bps to 7.26%. Inverted curves for Sovereigns when policy rates are low (as they are now) suggest distress. It means that the marginal buyer is thinking about ‘recovery’ (if you discount all paper by a the same amount, the short yield will rise by more).
The worrying thing about this is that the short tenders are the ‘easy’ ones to get away. Italy aims to raise EUR8.8bn next week (28 and 29 Nov) via auctions of longer paper, and on present performance 10yr ~8% seems plausible.
Adding to the sense of crisis, S&P downgraded Belgium to AA, citing protracted political uncertainty, and a slowing economy (something that could be said of pretty much every Sovereign).
As a result of all this, the market has pulled even further back from European banks. The 3m EUR/USD cross currency basis swap fell to -156.25bps, which is the lowest it has been since Q4 2008. This means that European banks are willing to lend EUR cash at 3m EURIBOR less 156.25bps, in exchange for 3m USD at LIBOR flat.
With three month Euribor at 1.475%, that means that we have -ve rates on EUR cash if you are willing to lend them USD cash. That is, European banks must PAY someone to take their EUR off them for 3m, and then also PAY 3m USD LIBOR on the USDs they borrow.
I think it’s fair to say that we are now in a full blown financial crisis.