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Thursday, March 28, 2024

Europe Treads Water Awaiting UK’s Return To Reality

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

For the second day-in-a-row, European volumes are light with stocks and credit generally trading sideways in a tight range. European credit spreads are illiquid (and mostly just reracked by skeleton desks in mainland Europe) as sovereign CDS are generally closed completely (we’ve seen very few runs). Optically, much is being made of the 4th day in a row of compression in Spanish and Italian bond yields – which is ironic given the Spanish comments on being shut-out of the markets and their pending auction this week – but as we pointed out last week, the lack of CDS discipline being enforced (with London shut) as basis traders and financials-versus-sovereign trades become the marginal drivers of demand for sovereign debt. Do not believe that the markets of the last two days in Europe represent anything but marginal flow – tomorrow’s return of the credit market will be the test of where reality is really perceived by market participants. EURUSD weakness today, reverting to unch from Friday and the deterioration in EUR-USD basis swaps is all you need to know on where liquidity is. Clearly the LTRO3 trade is being placed in financials-sovereigns-land, we only hope they are not disappointed.

Stocks and corporate credit going nowhere fast this week (while sub financials are outperforming as we suspect the senior-sub COMpression trade is active on the back of expectations for more encumbrance crushing recovery expectations for senior debt)…

but pivot sovereigns appear to be improving – hoorah…

but a quick look at the CDS-Bond basis tells the story – look at the blue and black lines revert higher (as CDS markets are closed) – bringing the basis back…

and also – the flows into short financials credit, long domestic sovereign are picking up as expectations of any ECB save will come with encumbrance are hitting home…

Meanwhile EURUSD has round-tripped to unch from Friday…

Charts: Bloomberg

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