Europe's Chaos Spilling Over (Naked Capitalism)

THURSDAY, NOVEMBER 24, 2011

German Bund Action Goes Badly; Bank of America CDS Spread Hit New High; EuroSovereign and US Bank Spreads Widen More. Will the Germans Finally Break Glass?

As our overly-long headline tells you, Wednesday was a really bad day in credit land. Not only has the reality of the severity and seeming intractability of the Eurozone mess started sinking in, but US investors seem finally to be facing up to the fact that a full blown crisis would not be contained and will engulf American banks. If you thought September-October 2008 events were nasty, they could look like a mere trial run for what may be in the offing.

The Financial Times coverage on the failure of the Bund auction is suitably grim:

The worst-received bond sale by Germany since the launch of the euro fuelled market fears that the continent’s debt crisis was now affecting Berlin…

The bond auction only managed to raise two-thirds of the amount targeted..

The euro, which has held up relatively well despite the turmoil in the bond markets, suffered one of its biggest one-day falls against the dollar this year, while eurozone government debt was sold off across the board…

But as fear spread across trading floors, Germany started to trade like a risk asset with Bund yields, which have an inverse relationship with prices, rising roughly in line with French, Italian, Spanish and Belgian yields. However yields on short-term German debt went into negative territory, meaning that investors effectively are paying to hold the bills because they see Berlin as a safe haven..

A senior trader at a US bank said: “We are now seeing funds and clients wanting to get out of anything that is denominated in euros and that includes Bunds because they don’t know what will happen to monetary union. It is not helped by the year-end with most banks not prepared to buy anything.”..

The so-called failure also comes against a trend of poor auctions. It was the ninth auction that failed to meet its target this year, according to the German debt agency. However, demand was significantly weaker this time round.

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