European Yield and Risk Update – Have You Seen Spain’s Markets?

April 5, 2012 9:33 am

The problems in Europe are popping up again. The yield on Spanish bonds spiked and there is a general sense that the region is just about guaranteed to enter a recession, if it hasn’t already. Markets in Europe were hit hard and the Euro was off by another 0.75% to 1.314 at the close of the U.S. trading session.

The Spanish bond auction was not well received and the government was not able to sell the entire inventory they had planned.

Some insight on the charts below. In particular, note that an FX swap agreement is a contract in which one party borrows one currency from, and simultaneously lends another to, the second party. Each party uses the repayment obligation to its counter-party as collateral and the amount of repayment is fixed at the FX forward rate as of the start of the contract.

When the Euro/USD basis swap starts to move lower, it can be seen as a time when the risk of owning Euros over U.S. Dollars is increasing. Many believe that the -100 level is a key level that should be watched and -150 is a time when a crisis is occurring. Currently the level rests at -52.3, not that bad considering the levels we saw just a months ago.




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